Marketing best-practice dictates using options that best meet our financial objectives. Since money is scarce and everything costs money; return on investment rules supreme as the great leveler. While marketing has more options than the financial market has mutual funds (there are some 55,000 worldwide) finding the right target group is just as important. That’s why it’s critical to use a customer’s total spending as one means of deciding where to focus.

Broadly defined, customer capacity is the total amount of a category that a customer consumes. In both business-to-business and business-to-consumer marketing it includes our sales and those from competing options. Using capacity requires defining the competitive set, which depends on geography, product, and customer segments.

Calculating capacity
We may know how much we sell, but what about how much everyone else in our sector is selling? Leading analytic teams use one of three strategies for getting the rest of the pie.

Syndicated data: Some categories are blessed with third-party sources that capture all purchases. Panel data on consumers, physicians, or other target group provide the ability to define household capacity. This approach also works to assess online marketing on off-line sales.

Surrogate data: Some categories have a spending ceiling. In grocery settings the combination of family makeup and recommended daily allowances for calories yields a proxy of total capacity. In financial areas indexes of disposable income can be used to estimate the spending limit.

Custom research: In other cases, the best strategy is to ask people directly. The goal is to value capacity based on factors that are known about existing customers. Once the relationship is understood we can tag the house file or the prospect universe.

We now have two ways of valuing a customer: his sales or spending and his capacity to consume the category. The difference between these two is the “headroom.” When set as a dollar value, headroom fixes the amount of spending used to shape customer behavior. Targets with large headroom should receive more money, since they are worth more.

Headroom and loyalty are related concepts. Loyalty may be defined as satisfying a large portion of a customer’s needs. Companies use different terms to reflect this idea: Financial services use “share of wallet”; retailing uses “share of stomach”; media refer to “share of voice.” Headroom is the spending we don’t capture.

There is also a link to lifetime value (LTV). Both a company and the category have expected long-term values. In highly competitive cases headroom will exceed life time value.

How much to spend on whom
There are three routes to growth: induce switching, increase consumption, and find new users. Knowing capacity will help you determine how much to spend on each.

Valuable prospects have headroom. Note that those most likely to provide growth may not in fact be the typical ones in a Pareto analysis. While a small segment of customers may account for a majority of our sales, they may not necessarily have the most upside. Thus spending on internally high-value customers may be inefficient because their needs are already met.

Broadly speaking, customers can be sort into four categories as determined by their current value to your company and their headroom:

Long Tail Pawns (low value, low headroom): These customers spend little and have no upside. So while they support our business, they aren’t likely to grow. The concept of “long tail” arose in the discussion of products–the share of the lowest-selling items could exceed the top-selling items if distribution costs were slashed. If the cost of service can be similarly changed (resellers effectively do this), then there is a chance for a large aggregate value from many low-value customers. Like pawns in a chess match, they serve a very useful purpose and should be marketed to accordingly.

Loyalist Defense (high value, low headroom): These customers reward us with a lot of business but have no more to give. Nurture and defend them. Appropriate programs reward loyalty but do not focus heavily on incremental revenue. A simple thank-you gift may be most fitting and work wonders in stemming attrition.

Aggressive Treatments (low value, high headroom): These are customers whose capacity is likely satisfied by competitors. Actively identifying, pursuing, and satisfying known demand can support more- aggressive approaches. The risk of losing low current value is more than offset by longer-term potential gains. Innovative offers around trial, preemption, and upsell fit this segment.

Organic Fertilizer (high value, high headroom): Potentially the most valuable group in terms of per-customer profitability. They reward us with a major amount of their business, and they have more to give. Since they are high-value to us, a loss would be significant. This risk suggests that the higher costs of relationship-building (like those of organic agriculture) are worth the investment.

In sum, we must create and capture a portion of each customer’s capacity. By segmenting customers in terms of headroom we better understand this from the bottom up. Many financial analyses start with the total market and then define a share target. This top-down approach suffers when the financial analyst’s spreadsheet hits the marketing manager’s campaign tools. Exactly whom do we target to achieve that number?

Marketing and finance should revisit two equations in the budgeting process. First, marketing expense as a percent of revenue is often fixed at some historic level–say, 5%. By segmenting customers in terms of their headroom and adjusting the allocation accordingly, you can make marketing more dynamic and accountable.

Second, the most dangerous cell is the one that says next period’s sales will be some percentage increase over current levels. Businesses stumble over this deviously simple assumption. It leaves open to sort out later akey question: Just which customers will generate that increase? Understanding the capacity of various customer segments provides much more precision and insight into the budgeting process.

Anthony Power helps clients use customer information to create innovative strategies, positioning, and solutions. He posts short points on http://apowerpoint.blogspot.com and can be reached at [email protected]

Marketing best-practice dictates using options that best meet our financial objectives. Since money is scarce and everything costs money; return on investment rules supreme as the great leveler. While marketing has more options than the financial market has mutual funds (there are some 55,000 worldwide) finding the right target group is just as important. That’s why it’s critical to usea customer’s total spending as one means of deciding where to focus.

Broadly defined, customer capacity is the total amount of a category that a customer consumes. In both business-to-business and business-to-consumer marketing it includes our sales and those from competing options. Using capacity requires defining the competitive set, which depends on geography, product, and customer segments.

Calculating capacity
We may know how much we sell, but what about how much everyone else in our sector is selling? Leading analytic teams use one of three strategies for getting the rest of the pie.

1. Syndicated data: Some categories are blessed with third-party sources that capture all purchases. Panel data on consumers, physicians, or other target group provide the ability to define household capacity. This approach also works to assess online marketing on off-line sales.
2. Surrogate data: Some categories have a spending ceiling. In grocery settings the combination of family makeup and recommended daily allowances for calories yields a proxy of total capacity. In financial areas indexes of disposable income can be used to estimate the spending limit.
3. Custom research: In other cases, the best strategy is to ask people directly. The goal is to value capacity based on factors that are known about existing customers. Once the relationship is understood we can tag the house file or the prospect universe.

We now have two ways of valuing a customer: his sales or spending and his capacity to consume the category. The difference between these two is the “headroom.” When set as a dollar value, headroom fixes the amount of spending used to shape customer behavior. Targets with large headroom should receive more money, since they are worth more.

Headroom and loyalty are related concepts. Loyalty may be defined as satisfying a large portion of a customer’s needs. Companies use different terms to reflect this idea: Financial services use “share of wallet”; retailing uses “share of stomach”; media refer to “share of voice.” Headroom is the spending we don’t capture.

There is also a link to lifetime value (LTV). Both a company and the category have expected long-term values. In highly competitive cases headroom will exceed life time value.

How much to spend on whom
There are three routes to growth: induce switching, increase consumption, and find new users. Knowing capacity will help you determine how much to spend on each.

Valuable prospects have headroom. Note that those most likely to provide growth may not in fact be the typical ones in a Pareto analysis. While a small segment of customers may account for a majority of our sales, they may not necessarily have the most upside. Thus spending on internally high-value customers may be inefficient because their needs are already met.

Broadly speaking, customers can be sort into four categories as determined by their current value to your company and their headroom:

• Long Tail Pawns (low value, low headroom): These customers spend little and have no upside. So while they support our business, they aren’t likely to grow. The concept of “long tail” arose in the discussion of products–the share of the lowest-selling items could exceed the top-selling items if distribution costs were slashed. If the cost of service can be similarly changed (resellers effectively do this), then there is a chance for a large aggregate value from many low-value customers. Like pawns in a chess match, they serve a very useful purpose and should be marketed to accordingly.
• Loyalist Defense (high value, low headroom): These customers reward us with a lot of business but have no more to give. Nurture and defend them. Appropriate programs reward loyalty but do not focus heavily on incremental revenue. A simple thank-you gift may be most fitting and work wonders in stemming attrition.
• Aggressive Treatments (low value, high headroom): These are customers whose capacity is likely satisfied by competitors. Actively identifying, pursuing, and satisfying known demand can support more- aggressive approaches. The risk of losing low current value is more than offset by longer-term potential gains. Innovative offers around trial, preemption, and upsell fit this segment.
• Organic Fertilizer (high value, high headroom): Potentially the most valuable group in terms of per-customer profitability. They reward us with a major amount of their business, and they have more to give. Since they are high-value to us, a loss would be significant. This risk suggests that the higher costs of relationship-building (like those of organic agriculture) are worth the investment.

In sum, we must create and capture a portion of each customer’s capacity. By segmenting customers in terms of headroom we better understand this from the bottom up. Many financial analyses start with the total market and then define a share target. This top-down approach suffers when the financial analyst’s spreadsheet hits the marketing manager’s campaign tools. Exactly whom do we target to achieve that number?

Marketing and finance should revisit two equations in the budgeting process. First, marketing expense as a percent of revenue is often fixed at some historic level–say, 5%. By segmenting customers in terms of their headroom and adjusting the allocation accordingly, you can make marketing more dynamic and accountable.

Second, the most dangerous cell is the one that says next period’s sales will be some percentage increase over current levels. Businesses stumble over this deviously simple assumption. It leaves open to sort out later akey question: Just which customers will generate that increase? Understanding the capacity of various customer segments provides much more precision and insight into the budgeting process.

Anthony Power helps clients use customer information to create innovative strategies, positioning, and solutions. He posts short points on http://apowerpoint.blogspot.com and can be reached at [email protected].