Check Out Customer Attractiveness
Most business models have customers that are neither exceptionally attractive nor exceptionally unattractive. Most business models don’t need to focus on customer attractiveness for long because the old mantra “all customers are good customers” is true most the time. However, you do have to study customer attractiveness.
You can create an attractive market niche, but have it destroyed by bad customers. Attractive customers have a strong need for your offering, value the solution to their problem more than your product costs (that’s a strong value proposition), have disposable income to spend on your offering, pay their bills on time, and exist in sufficient numbers to make your venture profitable.
The most prominent example of gaining the most attractive customer is the retail mantra “location, location, location.” What does an outstanding retail location get you? Outstanding customers, that’s what. A high-end retail mall has the same industry attractiveness and niche attractiveness regardless of where it’s located.
Whether the mall is located in the hottest new suburb or the middle of farmland, the industry and niche attractiveness remain the same. However, the high-income customers available in the hot new suburb are typically viewed as more attractive than those in rural locations.
Rent-A-Center is in the same industry as Best Buy. The two companies have some niche overlap, but they serve significantly different customers. Best Buy serves customers who can afford to purchase a television in full. These customers have either cash or pre-arranged financing like a credit card.
Rent-A-Center caters to customers with lesser credit availability. Rent-A-Center extends credit to buyers deemed undesirable by traditional retailers like Best Buy. Rent-A-Center accepts monthly or weekly payments from customers until the item is paid in full. Due to the differences in the customer segments they serve, Rent-A-Center’s business model is significantly different from Best Buy’s:
Best Buy serves a larger number of buyers who are more financially stable and makes money with a traditional retail business model — buying and selling merchandise.
Rent-A-Center is closer to a specialty finance company that happens to sell appliances. Because Rent-A-Center doesn’t collect payment in full upfront, the company has many profit areas that Best Buy doesn’t have. Finance fees, high interest rates on loans, repossession fees, and more account for the bulk of Rent-A-Center’s profit.
Many businesses would consider the customers of Rent-A-Center less than desirable. However, Rent-A-Center has created a profitable business model selling to these supposedly less-than-desirable customers. Because the Rent-A-Center model accounts for sporadic and occasional nonpayment, it’s a workable business model.
More affluent customers don’t make a market segment more attractive. Typically, more affluent customers can afford to pay a higher price for goods and services. High margin typically follows these higher prices, but may well be set off by higher overheads and lower volumes owing to a higher degree of exclusivity.
Simply chasing affluent customers isn’t always the best strategy. Remember the old adage, “Sell to the masses, live with the classes. Sell to the classes, live with the masses.”
If you meet ten business owners in the construction industry, you’ll probably meet someone whose business was destroyed by a slow-paying or nonpaying customer. A workable business model can be destroyed by the wrong customers.
As a businessperson, you must eliminate or account for bad customers in your business model.