Deeply understanding your customers helps you run your business well. Surveys, conversations and statistics all play a part. Together these tools help you get to know your customers, including what they need, how they decide to buy, and how much profit they bring to your business.
Gathering all this information helps you:
Small businesses often have direct contact with customers, which is a good start. You can learn a lot from informal interactions. For example, you might hear what regular customers worry about and spot any trends early. But properly planned research is the best way to build your insights — especially if your business involves little or no face-to-face customer contact.
After learning about people’s preferences, pain points and behaviour, the next step is to sort customers into groups. This helps you identify a target group and serve them effectively.
Surveys are one way to find out about current and future customers. You can ask a wide range of questions, eg:
Start by deciding who you’d want to participate in your survey. For example, you might research existing customers or potential customers, and focus on a particular age range, location, or set of interests. Think about how you can:
Some businesses carry out short surveys at the point of sale. This data can help identify best-sellers, so you can improve the customer experience of that product. Or it might show what people look for in the market, helping you make better decisions on product selection or stock levels.
You can ask questions face-to-face at the sales desk if your business model allows. If your customers buy online, build questions into the buying process, eg a post-purchase feedback form. Keep it brief, so you don't take up a lot of your customers time.
Beyond asking questions, observing customers can tell you even more about how they behave. You can learn about their lifestyles and buying patterns, about cultural trends, and factors that affect buying behaviour. Examples include asking how your product fits their daily routine, or checking if people use your product differently from how you intended. Try showing customers a new product or idea and see how they react.
Whichever method you use, make sure people understand what information you’re collecting and how you will use it.
Another option is to observe customers in different settings:
Businesses often offer a reward to encourage customers to take part in research. For example, a discount, free product or gift voucher to thank them for their time.
Existing data on buying behaviour from trusted sources can tell you a lot about potential customers, where they buy, and market size. Reports and statistics can also show trends, eg:
For example, a business offering a face-to-face advice to small tech businesses might seek out statistics on:
Business experts increasingly recommend ethnographic research methods traditionally used by anthropologists. Studying customers in detail helps businesses gain deep understanding of what matters to them.
Whatever methods you use to research your customers, you’ll find different ways to group people and their preferences. The next step is to set a strategy to cater to their needs.
If you want to cater to as many people as possible, you still need to identify how your customers could be segmented. You might need different strategies for each segment. For example, different social media channels for customers aged 15 to 30 vs those aged 45+.
Build up your strategy in three steps:
For example, a pest control business might identify young families as a promising segment. These potential customers want to keep their children safe from pests and from harmful chemicals — and are happy to pay extra for a non-toxic but effective service. The business could promote itself using a family-safe promise and testimonials from other young families.
Understanding how customers compare products or make decisions helps you work with their behaviour instead of against it. Customers make decisions for a mix of rational and emotional reasons.
What customers experience affects how they act. For example, good lighting and music may encourage people to buy clothes. Tasty aromas like fresh-baked bread can tempt people into a bakery.
Offering rewards to loyal customers can help people build up pleasant memories and positive associations with your brand. For example, giving the customer their 21st coffee for free.
What motivates customers to buy what you offer. A basic product targets people’s needs. A premium product should meet needs, but may also attract people who want a respected brand, or aspire to a certain lifestyle.
Understanding these steps helps you send relevant messages to customers at each step in their journey.
Your interest in the customer doesn’t end after these four basic steps. After the purchase, customers form their opinion of what they bought. So, it’s important to gauge customer satisfaction. Ask for feedback. How likely are they to buy from you again or recommend you to friends and relatives? Also, look out for negative feedback, which could affect public opinion of your business.
Every product or service has its own version of the buying process. Something leads customers to consider buying from you, and their situation affects how they decide.
Studying the journey your customers take helps you to optimise their experience. What you learn could help you:
For example, customers seeking quick tyre repairs are probably under time pressure and anxious to get back on the road.
From a repair business, they need:
A related service, replacing ruined tyres on the spot, could help them get moving again if repairs are impossible. This service adds value, even if it’s not exactly what they searched for.
Jian owns an art supply store. He wants to offer a better experience for regular customers. Jian starts by collecting point-of-sale information. He sees that Rosie, who runs evening classes for adults, makes a mix of large and small purchases. She buys mid-range supplies in bulk, but also high-quality paints and canvases in smaller amounts.
Jian decides to study a few customers in depth to understand their needs. He meets Rosie at the community centre and learns she buys the bulk orders for her teaching business, with smaller orders for herself.
While Rosie places the bulk orders regularly, they can change in size by about 30%. Jian discovers this is linked to the size of her classes. When she’s shopping for herself, Rosie also keeps an eye out for interesting new products.
Jian uses these insights to help him cater better to customers who visit for more than one reason. He sets up his customer records so each person can have more than one account. Now he can automatically email Rosie GST invoices for her business spending so her accounting is easier. Jian makes up a range of standard kits for art classes to make repeat orders quicker and easier. To cater for Rosie’s interest in new products, he adds a display stand dedicated to new arrivals.
Using these common metrics can help you plan marketing campaigns and make effective decisions in your business.
The customer acquisition cost is defined as the cost to gain each new customer. To work this out, divide the amount you spend on marketing by the number of customers you gain as a result. For example, if $450 campaign gains 30 new customers, each new customer costs $15. Include costs like wages and a share of office space as well as the direct costs.
You can then:
Using the example above, in which each new customer costs $15, planning to gain 50 new customers will need a marketing budget of at least $750 ($15 x 50 = $750).
The customer lifetime value is defined as the total revenue you earn from a customer over the whole period of your relationship with them.
The cost to gain a new customer doesn’t tell you how much profit you make while they remain a customer. To work this out, estimate how long you will keep a customer and how much they are likely to spend during that time.
Calculating the lifetime value helps you understand which customers to focus on. For example, a one-off customer who spends $70 vs a loyal customer who regularly spends $50. It might cost the same to gain both customers, but their lifetime value shows the benefit in catering to the lower-spending loyal customer.
This means your total revenue from a customer should be at least 3 times of what you spend on acquiring them.
Customer retention is defined as an ability of a business to hold on to its customers.
This metric is usually calculated as a percentage. It shows if a business holds on to customers over time, which can depend on industry, market position and what they sell. For example, a business serving people who come back year after year may retain 80% of its customers. A business that gains and loses customers each month might retain 20% of its customers.
Calculating customer retention helps you manage your business. The more customers you retain, the fewer new customers you’ll need to make up for the ones who leave. Gaining new customers tends to be more expensive than retaining existing customers. Also, retained customers typically buy more often and spend more than newer customers.
Loyal customers are also more likely to sing your praises and refer you to friends and family, bringing in new customers free of charge.
Another way to understand customer loyalty is to calculate a net promoter score (NPS), which shows how likely your customers are to recommend you to other people. Your NPS is based on customers’ responses to a question like: “On a scale from 0-10, how likely are you to recommend our company/product/service to a friend or colleague?”
When you deeply know your target customers, use these insights to identify what to sell and where best to sell it.
How high is too high, how low is too low? Plan a pricing strategy that suits your customers and your business.
Online or face to face, there are many ways to communicate with customers. Here’s how to choose and plan.