Understanding which customer segments are most profitable is fundamental to smart marketing. Too often, Australian SMEs treat all customers the same, missing opportunities to focus resources where they’ll have the biggest impact on revenue. It’s not just about who *buys* the most, but who buys profitably. We see businesses consistently surprised when they actually analyse this.
So, how do we work this out? It starts with moving beyond simple revenue figures. We need to calculate Customer Lifetime Value (CLTV) adjusted for the cost to serve each segment. This means factoring in everything from acquisition costs – advertising, sales time – to ongoing support and fulfilment. A high-revenue customer isn’t necessarily profitable if they require excessive support or are expensive to acquire.
Here are a few key insights we’ve observed:
- Segment profitability varies widely: You’ll likely find 20% of your customer segments generate 80% of your profit. Identifying this ‘vital few’ is crucial.
- Acquisition cost is a major differentiator: Customers acquired through organic search or referrals are almost always more profitable than those from paid advertising, even if the initial sale is smaller.
- Repeat purchase rate impacts CLTV: Segments with higher repeat purchase rates are inherently more valuable. Marketing efforts should focus on nurturing these relationships.
- Product mix matters: Some segments consistently purchase higher-margin products or services. Understanding these preferences allows for targeted promotions.
Don’t fall into the trap of assuming your ‘best’ customers are the most profitable. A quick win is to categorise your existing customer base – perhaps by industry, business size, or purchase behaviour – and then estimate the average acquisition cost and support cost for each. Even a rough calculation will highlight segments deserving more attention.
The next step? We recommend a proper CLTV analysis for your key segments. This will provide a clear picture of where to invest your marketing budget for maximum return. Focusing on the most profitable segments isn’t about ignoring others, it’s about making informed decisions to drive sustainable growth.
