Customers Are Your Scarcest Resource

A few years ago Peppers & Rogers Group was hired by a multi-line insurance company to help solve a problem. They wanted to know how much value they lost each time one of their star agents brought in a new client.

This company offered property, auto, life, and a few other types of insurance. Their captive agents were all trained and authorized to sell each of these different insurance lines, and they were paid by commission. As with many insurance firms and other companies with similar distribution networks, this firm protected each agent's relationship with his or her own client by forbidding other agents from trying to sell to them. Once an agent brought in a new client, the company assigned that client to that agent, and refused to allow any of its other agents to poach.

So far so good, but the problem involved a number of agents who had become specialists in particular types of products, and simply had no interest in selling other lines. There were a few auto specialists, for instance, who sold nothing but auto policies. Each of these agents was very good at prospecting for new auto clients and then selling to them, but once a new client had bought an auto policy, rather than trying to move the client into property or life insurance or anything else, the agent would simply turn around and try to find another auto client to sell to.

So, while some of these one-product specialists were super salespeople and had the sales awards to prove it, the company figured it was actually losing money every time one of them acquired a new client, because that new client would never buy any other product from the firm!

If there were an unlimited number of customers, of course, this would not have been a problem. But customers aren't infinite, are they? Only a limited number of customers and prospective customers are available for any business. Even if you have millions of them, it's still a finite number. You can count them.

This particular insurance company faced some markets that were very well developed, and they had a high market share in one or two product lines. They were beginning to feel the pinch of customer scarcity.

Customers are scarcer than capital.

If you have a good business idea (that is, one with a high return on investment), you can almost always find the capital required to fund it. You could raise the capital from your shareholders, or get a loan from a bank, or borrow the money from your Uncle Dave, and pay it all back later with interest. Capital is virtually unlimited, because it has a price, and as we "use it up" the price simply increases.

But there is no secondary market for customers. No bank is going to lend you some customers to create value, then let you pay them back later with interest. This means you need to create whatever value you can, from whatever customers and prospective customers are available to you. Every time you give up a chance to create more value with a particular customer, it is a permanent, irretrievable loss to your business. You can't simply make it up with another customer.

Let me suggest a simple example to drive home the implications of this kind of thinking. Let's suppose you have tested two different marketing initiatives, and you now need to choose which one to roll out. The return on investment (ROI) for these two initiatives looks like this:

• Initiative A requires investing $100 per customer and earns a 50% ROI.
• Initiative B requires investing $150 per customer and earns a 40% ROI.

Which initiative should you select?

Obviously, Initiative A generates a significantly higher ROI, so it's a much better use of your financial resources, right?

Unless…. What if you only had one customer? If you only had a single customer, then Initiative B would be more desirable, because you could generate $60 in total profit rather than the $50 you'd be generating with Initiative A.

You with me so far?

OK then, would your answer be any different if you only had a dozen customers? No? How about a million? Would it be different then?