It goes without saying that being able to efficiently acquire new customers is integral to long-term profitable growth. But what if it your capability to acquire new customers became a source of sustainable competitive advantage in the same way that superior scale, proprietary data, long term customer relationships or hard to get accreditations are?
Sustainable competitive advantage is typically defined as the ability to outperform competitors in a way that is very hard for competitors to replicate. In my experience, businesses in a variety of markets have been able to create sustainable competitive advantage through leveraging the marketing flywheel effect. Building such an advantage is key part of your marketing function operating as a profit centre rather than a cost centre.
What is the marketing flywheel
To turn your customer acquisition efforts into a source of sustainable competitive advantage, you need to a virtuous cycle of customer acquisition, also known as a marketing flywheel because of its potential multiplier effect on growth. There are four components to this flywheel, which follow the customer lifecycle:
1. Generate demand from wide variety of sources
2. Optimise cost and quality of demand
3. Maximise conversion / yield of demand
4. Understand and maximise customer lifetime value
To create the virtuous cycle, or flywheel effect, you will need to drive a process of continuous improvement in each of these four areas. The result is that you will be able to be able to spend more per unit of demand that your competitors because you have confidence in making a higher return on this marketing investment.
This investment might be in the form of media spend, partner funding or potential even discounts. For example, a foodservice concession operator could be prepared to offer the best terms to a landlord as you have confidence in making a higher yield than any of your competitors.
As a business starts to develop this flywheel effect, they benefit from seeing even more data to optimise against and reinforce the initial advantage. Think of this as like an experience curve – the more you do something, the easier and better you do it.
When I started leading marketing efforts in the car rental sector in 2014, my big competitor was part of Priceline Group, and they were consistently appearing in the top position in paid search. To outbid them, I realised I would have to increase my bids by at least 3x – which would have been deeply unprofitable at that point.
As I started to learn more, I realised that my competitor was applying learnings from their Priceline stable-mate, Booking.com – one of the most well known examples of the marketing flywheel, using constant experimentation (sometimes more than 1,000 experiments at once) to drive improvements to conversion and yield. Their approach has been documented in a great HBS case I’d recommend reading, or a helpful summary here.
I spent the next three years creating our own marketing flywheel to close the gap and allowing us to compete effectively.
How to create a marketing flywheel in your business
There are many ways you can start to drive optimisations in each of the four stages of the marketing flywheel, and I’ve suggested a few ideas to get you started. As the Booking.com example highlights, what matters is that you test many different ideas, take the learnings and evolve continuously. Make sure that when designing a test, you will come up with a definitive answer – ‘this maybe works’ is an unhelpful outcome.
1. Generate demand from wide variety of sources
Finding the most effective channels to reach your target audience – in your particular market there will be many different options for how to reach your prospective customers – digital marketing, partnerships, events, above the line, outbound lead generation. Understanding your headroom for growth in different channels is an important input here, for example completing a Search Headroom analysis in organic search.
Adopt a systematic approach to testing each channel – at enough scale that you will understand the incremental impact on your marketing outcomes.
2. Optimise cost and quality of demand
I’ve talked about this subject in the context of Cost Per Acquisition, which I would suggest reading.
Within each marketing channel, test all of the variables you can control – the targeting, creatives, copy, and landing pages for digital marketing; the content and format of events, or the commercial model in partnerships.
Improve the accuracy of your measurement and attribution – for example I’ve worked with an online travel business that generated significant competitive advantage from having the best mobile device attribution model.
3. Maximise conversion / yield of demand
Examine every aspect of your marketing journey from the customer perspective to remove frictions and reinforce your value proposition.
Do this for both the online and offline parts of your journey, e.g. consider for a SaaS business consider whether a self-serve or assisted sales motion is most effective. I’ve always found mystery shopping your own product or service produces a long list of potential improvements.
Pricing optimisation – review both your approach to packaging and headline pricing. I’m going to cover this in more depth in a future article.
4. Understand and maximise customer lifetime value
I’ve talked previously about how to calculate and improve Customer Lifetime Value. The key is that you need to have enough confidence to use your calculation of LTV as the basis for your decisions about marketing investment i.e. using LTV:CPA ROI. If you miss this critical step, you are unlikely to be able to create that competitive advantage as someone else in your market will probably be thinking this way.
You will likely uncover which customer segments offer the right balance of both superior lifetime value and ability to target in large numbers through your marketing efforts.
If you are wondering where to start developing the marketing flywheel in your business, you could ask yourself:
· If you cleared your diary for tomorrow, what would you spend your time on?
· What part of the flywheel do you know the least about in your own business?
· Where have you spent the least time to date?
· Where is the biggest bottleneck in your customer acquisition efforts?
· How do you benchmark vs your competitors in each of the four stages?
It is important to remember that even if you create competitive advantage through superior customer acquisition, you should never get complacent. Your know-how will leave each time a member of your marketing team moves onto a new role in a different, competing organisation – as evidenced by the number of travel start-ups now led by Booking.com alumni. ‘Sustainable’ advantage does not mean ‘permanent’.
If you’d like to discuss how you can create a marketing flywheel in your business, please Contact Me.
All views expressed in this post are the author's own and should not be relied upon for any reason. Clearly.