The NBD model – ways to grow your business

Let’s get mathematical for a change and talk about negative binomial distributions (NBD) – more specifically the NBD-Dirichlet Model as developed by Andrew Ehrenberg (Wikipedia Link Here).

The maths of this need not put you off, however, if you understand the principles that Ehrenberg uncovered you will improve your business decision making rapidly.

For a great introduction to this model and also to read one of the best books on business I have ever read please track down Byron Sharp’s ‘How brands grow, what marketers don’t know.’  The following is a precis of some of the points from Byron’s book.

The above is an idealised version of a negative binomial distribution – I say this to mean that the percentages and frequencies are guaranteed not to match your industry, but the principles of this illustration are what counts. And apologies to Byron Sharp – the following is my poor attempt to paraphrase the key principles.

First off, you can see that light buyers represent the largest part of your buyers. In other words it is infrequent buyers who make or break your business.

I personally think you can also apply this to a service business too if you think of the number of purchases as blocks of billable hours.

Secondly, you can see that improving the loyalty of your frequent buyers won’t make that much of a difference to your revenues.

Thirdly, targeting a particular segment of your buyers is unlikely to make a material difference to your business. You are better off targeting the light, medium and heavy buyers through mass marketing.

Finally, as your market penetration grows the binomial distribution will stay roughly the same shape, it’s just that you earn more sales revenues. Again, this means you are better off targeting all buyers rather than a select few.

Ever since reading this I have been applying (and likely misapplying) this principle all over the place.

Even this blog and the user statistics bear out the NBD-model in a crude way.

My main marketing so to speak is LinkedIn. I post the blog on a Monday and my regular readers are on to it the same day. However, after reading about the NBD model I realised many people may log on to their LinkedIn account weekly if not monthly.

So given that most of us don’t go past the first page of news on LinkedIn by Friday my blog post advertisement would be buried by new posts somewhere on page 2 or 3 of your LinkedIn home page.

As an experiment I started reposting (sometimes) on a Friday, and lo and behold, readership went up as I captured those who log on on Friday and Saturday too.

To take it to the next stage, I realised that many LinkedIn users only log on every month or so – which I see when someone logs on and catches up on 10 or 20 postings – which happens once every week or so. So, the next step would be to repost old blog postings regularly (daily) as the light readers would be unlikely to have read that headline yet. On the other hand, regular readers will become jaded, and many people would start blocking my LinkedIn posts. However, targeting lighter readers appears effective.

One of the key challenges I would like you to take away from this is how you can best service light buyers.  

For example, the following are a challenge to those in the world I live in, service firms:

• Calling all law firms – while it makes sense to chase large clients which undertake a lot of complicated transactions, don’t neglect the many thousands of small and medium size businesses that only undertake a transaction every 5 to 10 years.
• Calling engineering consultants – winning major deals that employ hundreds of people for a couple of years does make sense. However, have you thought about how to win and deliver the smaller jobs for smaller clients.
• Calling bankers – winning the big deal is nice, but I bet if you added up a lot of smaller deals it would be better for your bottom line.

I have been talking to some of you out there about this, and the most common line I am hearing against targeting lighter buyers in the service industry is that there are too many overheads and that it is hard to be efficient.

My counter argument to that would be to say that if you have a large volume of customers in the light buyer category then you are likely to make enough margin to cover the overheads.

As to the efficiency argument, my response would be to commodify those transactions as much as possible. A lot of service firms build themselves up around providing specific tailored solutions to exactly match each client’s exact problems. I’ll bet a lot of customers will be happy with ‘a solution’ as opposed to ‘the solution.’ I am sure you will find that much of what you are doing is the same, except for the names of the companies involved.

So, next time you are talking to someone about their business, feel free to ask how they are affected by the NBD-model. It’s a great party conversation.

P.S. After posting the above I was watching the cable TV show Storage Wars in which the most successful businessman said, "It was when I started selling low end items instead of just high end furniture that I turned my business around and started making a profit." It took this man 20 years to figure that out - don't wait that long.

Just be there when a decision is made

Make sure you're in the mix

This is both one of the most obvious and profound statements you can hear about marketing.

When somebody is making a decision to buy your product, they need to know about your product and know that it is available as a choice.

Let’s start with something simple to illustrate. When you walk to the drinks fridge at the shops you know you want a drink. You look at the available options and choose which one to buy. The chances are that you will buy one of the major brands because they are rich enough to spend enough on advertising to keep it front of mind for you. However, if they see a lesser known alternative then some people will try that just to see what it is like.

To take an example from the other end of the spectrum, if a company is looking to buy a product then their procurement process will allow them to identify available suppliers. They will usually go with the usual suspects, but as they are mandated to be fair, they will also consider newer suppliers. How are you making sure that they are aware that you exist and that you offer the product they want?

Really, this is the essence of all marketing. Your product needs to be present either physically, or in their minds when they are making a decision. If you want to get ahead learn to think like your buyers.

If they can’t find you they can’t buy you

Seems kind of obvious, but we all make this mistake now and again.

Marketing and sales often feels distasteful, especially for those with a technical or professional background.

However, without marketing and sales your business will soon cease to exist.

The starting place for any business is to go to people you already know and also word of mouth. You need sales coming in the door as soon as you can.

For a bricks and mortar presence or shop you need to be near or at street front with prominent signage. If foot traffic is important take a shop where there is a lot of street traffic, not down some side street just because it is cheaper.

If you just need an office space, then be where most of your customers are.

Make your website great, and make it easy for your customers to buy from you. Make the contact details prominent. Also, think about what it is you want them to do – is it email you for a follow up, register for a quote, call you, or what? Whatever it is you want them to do, make it easy for them to do it.

Make friends with a journalist or two and agree to interviews for their articles. This is a win-win situation – you get quoted in the paper and they get to fill in the inch columns they need to for their job.

Trade magazines are good for a lot of businesses.

Conferences are pretty good too. You can spruik the stand areas for a lot less than paying for a stand yourself. Also, go to a conference of potential customers and go and introduce yourself.

TV ads are expensive and for most startups are a good way to lose a lot of money for almost zero impact.

Google ads or similar will work if you are the kind of business people will search for.

Put stickers/decals on your car so when people are driving they see the message.

A final point to remember is that you should sell the product, then the brand. Again this seems obvious but many advisors put branding ahead of the product, but customers are buying the product not the brand. Brand building is actually the process of supplying customers with the product they want and growing the customer base.

Have fun, get creative, but most of all, let people know you exist.