![IMPORTANCE OF MARKETING FOR B2B COMPANIES IN THE DIGITAL AGE.
When confronted with the theory that Business to Business marketing is quite different than Business to Consumer marketing, my initial response is that that is completely a correct statement.
It is true, you don’t have to run television advertisements. You aren’t trying to sell 50 thousand t-shirts to a bunch of snotty nosed kids - you are selling welding guns to the guys who make cars. That however doesn’t mean that business to business marketing is less important - it is pretty much the contrary. To explain this, I have created a simple, mathematically based case study.
THE CASE STUDY: B2C Co. Vs. B2B Co.
INTRODUCTION
Take a trip with me down fantasy lane. Drop off your inhibitions, put reality in your purse, and shove your preconceived notions in the back of your desk drawer for a bit.
Imagine if you will 2 companies. One company specializes in the selling of cell phones in the GTA (ie. Telus) - we will call this company B2C Co.. The other company specializes in selling welding guns in the GTA to company’s that specialize in manufacturing, and we will call this company B2B Co.
It is safe to say here in this example that each company is catering to an area with a population of around 5.6 million. While each is targeting different groups and demographics, the area remains constant.
There are three factors that come into account the importance of marketing saturation which I will go through. The first step is to look at the market.
MARKET SATURATION:
To determine market saturation for fictitious companies requires a bit of educated estimation. The numbers given are partially based on real cases. The other portion is attained through data provided by the City of Toronto. The other is just speculation, because really consumers are unpredictable.
However, we will run with this in our land of make believe because despite the irrelevancy of these numbers, the saturation of the market is very important in understanding how a company’s advertising should be shaped. A general principal is that the amount of marketing is based heavily on market saturation. So let us start defining the market.
DEFINING THE AREA
First you need to establish the total population of the area you will be marketing to. In both company’s cases, they will be targeting a vast national, and even international, market. However, it is best to stick with a small area for math purposes. So let us use for our purposes an inflated, nice round number (something big enough to give us some real data) the FGTA (Fictional Greater Toronto Area).
FGTA Population = 4.6 Billion
Now we have to determine how many ‘potential clients are for each company within the selected area.
THE COMPANIES
We will use our two company’s to compare. B2C Co. and B2B Co.
B2C Co. is a cell phone company that is based off the Data for the GTA sales made by Telus in the 2010 fiscal year.
B2B Co. is a ficticious company that sells welding guns. It’s primary markets are manufacturing and distribution (which is similar to your company’s market). The data for this company has been gathered from the City of Toronto annual reports, so the numbers are factual in that regard.
In 2010 B2C Co. made 23.7 million customer connections making $9.6 billion on cell phone sales.
In 2010 B2B Co. made 3.6 million dollars through 145 client connections. (These numbers are explained later).
B2C’s Potential Customers & Needed Marketing Success Rate For Stability
Because B2C deals with the public, their numbers will directly reflect the general population. If we say that B2C Co. were to deal with a market that was only 50% of the population (and that doesn’t take into account that many people have both a work and personal cell phone), we would conclude that their potential customers is reduced 2.8 billion people. Let us say that of that 2.8 billion people only 1/5 of those people will could be potential B2C customers. That would be 560, 000,000 people.
B2C Potential Customer Base = 560, 000,000
In 2010 B2C had a total of 23 700 000 sales that year, the sales per capital is:
number of sales / market = % sales per capita
23 700 000 / 560,000,000 = 4.23%
So out of the 560,000,000, their success rate in attaining sales needs to only be 4.23% in order to ensure that they maintain the same customer rate.
But what about B2B Co.’s required success rate?
B2B’s Potential Customers & Needed Marketing Success Rate For Stability
B2B Co. does not deal with the general public. So out of that 5.6 Billion people their available market is much much smaller. So let us look at the numbers.
First we have to determine their major markets. This would be Manufacturing and Distribution. Based on data from the the City of Toronto, let us say that the FGTA, as of 2009, had a total of 9, 778 company’s that specialized in this area. Let us eliminate, as we did for B2C Co, 50% as those who do not require the services provided by B2B Co. (They already have welding guns, don’t require them for their production, etc.).
That means that their target market is 4889. Now let us divide that and say that that again, only 1/5 of that group is likely to use the services provided by B2B.
B2B Potential Customer Base = 977.8
Using the same calculation as before we will take the total number of potential customers, and divide it by the number of customers to keep the same annual revenue.
number of sales / market = % sales per capita
145 / 977.8 = 15%
So out of the 977.8 potential clients, their success rate in attaining sales needs to remain at 15% in order to ensure that they maintain the same annual revenue.
AVERAGE CUSTOMER VALUE (AVC)
The equation for understanding the average customer value is:
Average yearly turnover / average number of customers per year = ACV
Average Customer Value enables you to understand how much money each of your client’s is worth to your average annual turnover.
How does this differ though in the two markets? Well, quite a bit.
B2C Co.’s AVC
B2C Co. sells directly to the public. B2C Co. in the FGTA calculated that in 2010 they made 23.7 million customer connections. In 2010 they concluded they made $9.6 billion on cell phone sales. So if we put in the equation:
Average yearly turnover / average number of customers per year = ACV
$9, 600, 000, 000 / 23 700 000 = $405. 06
Therefore, the average customer only brings in $405.06. If their marketing campaign misses one person, the value of that one client lost is only $405.06
B2B Co.’s AVC
B2B Co. has a total of 145 business that it supplies to in the FGTA. In 2010 this company made a total of 3.6 million dollars revenue.
Average yearly turnover / average number of customers per year = ACV
$3, 600, 000 / 145 = $24, 827.59
Therefore, the average value of the consumer (which in this case is another business) is $24, 827.59. If they fail to sell to that customer, or lose that customer, they lose $24, 827.59. That customer is a lot more valuable to maintain, it is also more valuable to attain that customer.
Let us now look at what the advertising ratio needs to be to acquire those customers for both the B2B and the B2C client.
MARKET LOSS BY % OF CLIENTS
B2C loses 13% of its Clients.
What if due to a poor advertising campaign, recession, problems within the infrastructure, and competition, B2C were to lose 13% of their clients (like Telus did last year)?
Well. First We have to determine how many customers that is…
clients x 13% = clients lost
23 700 000 x 13% = 3 081 000
Therefore, B2C lost 3,081,000 sales. But how does that affect things? We now have to investigate how much money those clients lost were worth.
Lost Clients x Previous AVC = Client Value Lost
3081000 x 405. 06 = $1,247,989,860
Now that we know how much they lost in revenue, let us look at the effects on revenue and AVC.
old revenue - loss = new revenue
$9, 600, 000, 000 - $1,247,989,860 = $8,352,010,140
old revenue / new customers = New AVC Required
$9, 600, 000, 000 / 20619000 = $465. 59
Each customer only has to increase their purchase therefore by $60.53
Hmm, I am sure they can just hide this in a slight increase in prices, set up fees, and other hidden things (ie. increased text messaging costs)
B2B loses 13% of its Clients.
Now let us see what happens to B2B’s AVC if they were to lose 13% of their clients.
So let us do the equation again!
clients x 13% = clients lost
145 x 13% = 19
Therefore, B2B lost 19 clients. That isn’t near as many as B2C. But how much money do they lose?
Lost Clients x Previous AVC = Client Value Lost
19 x 24, 827.59 = $471,724.21
Now that we know how much they lost in revenue, let us look at the total percentage of affect.
old revenue - loss = new revenue
$3, 600, 000 - $471,724.21 = $3,128,275.79
old revenue / new customers = New AVC Required
$3, 600, 000 / 126 = $28571.43
Each customer has to increase their purchase by $3743.84 if they are to keep the same income. This is much more difficult to hide in the price.
MARKET LOSS BY # OF CLIENTS
B2C loses 10 of its Clients.
So because of poor advertising and not reaching its clients, B2C loses 10 clients… let us see the effect.
Well. First We have to determine how many customers that is…
clients - 10 = new number of clients
23 700 000 - 10 = 23 700 000
Ok so let us figure out the percent of money lost!
clients x AVC = revenue lost/client
10 x 405.06 = 4, 050.60
old revenue - new revenue = new revenue
9, 600, 000, 000 - 4, 050.60 = 9599995949.4
[1 - (new revenue / old revenue)] x 100 = margin of loss
[1 - (9599995949.4 / 9, 600, 000, 000)] x 100 = 0.00004%
For B2C, because it has a higher number of potential clients, a bigger market base, and a much lower AVC they don’t even lose 1% of their income over 10 clients.
B2B loses 10 of its Clients.
Now let us say because of poor advertising not reaching its clients, B2B loses 10 clients… let us see the effect.
Equation time!
Clients - 10 = New Number of Clients
145 - 10 = 135
Ok so let us figure out the percent of money lost!
clients x AVC = revenue lost/client
10 x 24, 827.59 = 248, 275.9
old revenue - new revenue = new revenue
3, 600 000 - 248, 275.9 = 3,351,724.1
[1 - (new revenue / old revenue)] x 100 = margin of loss
[1 - (3,351,724.1 / 3, 600 000)] x 100 = 6.9%
For B2B, because it has a more specialized field of saturation, a bigger market base, and a much lower AVC they lose over 5% of their income, much more than B2C.
SUMMARY
So if we look at what we just calculated:
B2B’s requires more sales per capita than B2C.
B2B = 15%
B2C = 4.23%
B2B’s clients are more valuable per transaction than B2C’s
B2B = $24, 827.59/client
B2C = $405.06/client
Loss of B2B’s sales is more costly on average than B2C’s. If each lost 13% of their sales, B2B has a much higher inflation rate to recoup expenses.
B2B = $3743.84/sale
B2C = $465. 59/sale
The effect of losing one sale is greater for B2B than B2C. If each lost 10 sales, B2B gets hit much harder than B2C.
B2B = 6.9%
B2C = 0.00004%
CONCLUSION: THE EFFECT ON MARKETING
Yes the market for each company is different, but that doesn’t change the importance of sales for B2B.
While advertising may not seem needed by B2B to reach such a wide audience, the data explains that each sale is much more important.
If each sale is much more important, the advertising, and marketing for each sale is more important.
Just because a television campaign may not increase sales for B2B as it would for B2C, that doesn’t mean that their internet marketing presence should not be reflective of the value of their customers.
It is common knowledge that 25% of all budget should be spent on marketing, this is especially the case for a company that must compete with other company’s for a much smaller pool of clients. The fact that one company doesn’t know that you exist can make over ½ a percentage different in your annual income. In the B2B example, that would be the difference of $18, 000. If it were 10 clients, it would 180, 000.
But where do Client’s come from for the B2B. If they have a smaller marketing pool, what helps make the sale – and that is usually that they find you!
Read more on how to make finding you easier in my next article.](http://24.media.tumblr.com/tumblr_lhwso76rbt1qhcga1o1_1280.png)
IMPORTANCE OF MARKETING FOR B2B COMPANIES IN THE DIGITAL AGE.
When confronted with the theory that Business to Business marketing is quite different than Business to Consumer marketing, my initial response is that that is completely a correct statement.
It is true, you don’t have to run television advertisements. You aren’t trying to sell 50 thousand t-shirts to a bunch of snotty nosed kids - you are selling welding guns to the guys who make cars. That however doesn’t mean that business to business marketing is less important - it is pretty much the contrary. To explain this, I have created a simple, mathematically based case study.
THE CASE STUDY: B2C Co. Vs. B2B Co.
INTRODUCTION
Take a trip with me down fantasy lane. Drop off your inhibitions, put reality in your purse, and shove your preconceived notions in the back of your desk drawer for a bit.
Imagine if you will 2 companies. One company specializes in the selling of cell phones in the GTA (ie. Telus) - we will call this company B2C Co.. The other company specializes in selling welding guns in the GTA to company’s that specialize in manufacturing, and we will call this company B2B Co.
It is safe to say here in this example that each company is catering to an area with a population of around 5.6 million. While each is targeting different groups and demographics, the area remains constant.
There are three factors that come into account the importance of marketing saturation which I will go through. The first step is to look at the market.
MARKET SATURATION:
To determine market saturation for fictitious companies requires a bit of educated estimation. The numbers given are partially based on real cases. The other portion is attained through data provided by the City of Toronto. The other is just speculation, because really consumers are unpredictable.
However, we will run with this in our land of make believe because despite the irrelevancy of these numbers, the saturation of the market is very important in understanding how a company’s advertising should be shaped. A general principal is that the amount of marketing is based heavily on market saturation. So let us start defining the market.
DEFINING THE AREA
First you need to establish the total population of the area you will be marketing to. In both company’s cases, they will be targeting a vast national, and even international, market. However, it is best to stick with a small area for math purposes. So let us use for our purposes an inflated, nice round number (something big enough to give us some real data) the FGTA (Fictional Greater Toronto Area).
FGTA Population = 4.6 Billion
Now we have to determine how many ‘potential clients are for each company within the selected area.
THE COMPANIES
We will use our two company’s to compare. B2C Co. and B2B Co.
B2C Co. is a cell phone company that is based off the Data for the GTA sales made by Telus in the 2010 fiscal year.
B2B Co. is a ficticious company that sells welding guns. It’s primary markets are manufacturing and distribution (which is similar to your company’s market). The data for this company has been gathered from the City of Toronto annual reports, so the numbers are factual in that regard.
In 2010 B2C Co. made 23.7 million customer connections making $9.6 billion on cell phone sales.
In 2010 B2B Co. made 3.6 million dollars through 145 client connections. (These numbers are explained later).
B2C’s Potential Customers & Needed Marketing Success Rate For Stability
Because B2C deals with the public, their numbers will directly reflect the general population. If we say that B2C Co. were to deal with a market that was only 50% of the population (and that doesn’t take into account that many people have both a work and personal cell phone), we would conclude that their potential customers is reduced 2.8 billion people. Let us say that of that 2.8 billion people only 1/5 of those people will could be potential B2C customers. That would be 560, 000,000 people.
B2C Potential Customer Base = 560, 000,000
In 2010 B2C had a total of 23 700 000 sales that year, the sales per capital is:
number of sales / market = % sales per capita
23 700 000 / 560,000,000 = 4.23%
So out of the 560,000,000, their success rate in attaining sales needs to only be 4.23% in order to ensure that they maintain the same customer rate.
But what about B2B Co.’s required success rate?
B2B’s Potential Customers & Needed Marketing Success Rate For Stability
B2B Co. does not deal with the general public. So out of that 5.6 Billion people their available market is much much smaller. So let us look at the numbers.
First we have to determine their major markets. This would be Manufacturing and Distribution. Based on data from the the City of Toronto, let us say that the FGTA, as of 2009, had a total of 9, 778 company’s that specialized in this area. Let us eliminate, as we did for B2C Co, 50% as those who do not require the services provided by B2B Co. (They already have welding guns, don’t require them for their production, etc.).
That means that their target market is 4889. Now let us divide that and say that that again, only 1/5 of that group is likely to use the services provided by B2B.
B2B Potential Customer Base = 977.8
Using the same calculation as before we will take the total number of potential customers, and divide it by the number of customers to keep the same annual revenue.
number of sales / market = % sales per capita
145 / 977.8 = 15%
So out of the 977.8 potential clients, their success rate in attaining sales needs to remain at 15% in order to ensure that they maintain the same annual revenue.
AVERAGE CUSTOMER VALUE (AVC)
The equation for understanding the average customer value is:
Average yearly turnover / average number of customers per year = ACV
Average Customer Value enables you to understand how much money each of your client’s is worth to your average annual turnover.
How does this differ though in the two markets? Well, quite a bit.
B2C Co.’s AVC
B2C Co. sells directly to the public. B2C Co. in the FGTA calculated that in 2010 they made 23.7 million customer connections. In 2010 they concluded they made $9.6 billion on cell phone sales. So if we put in the equation:
Average yearly turnover / average number of customers per year = ACV
$9, 600, 000, 000 / 23 700 000 = $405. 06
Therefore, the average customer only brings in $405.06. If their marketing campaign misses one person, the value of that one client lost is only $405.06
B2B Co.’s AVC
B2B Co. has a total of 145 business that it supplies to in the FGTA. In 2010 this company made a total of 3.6 million dollars revenue.
Average yearly turnover / average number of customers per year = ACV
$3, 600, 000 / 145 = $24, 827.59
Therefore, the average value of the consumer (which in this case is another business) is $24, 827.59. If they fail to sell to that customer, or lose that customer, they lose $24, 827.59. That customer is a lot more valuable to maintain, it is also more valuable to attain that customer.
Let us now look at what the advertising ratio needs to be to acquire those customers for both the B2B and the B2C client.
MARKET LOSS BY % OF CLIENTS
B2C loses 13% of its Clients.
What if due to a poor advertising campaign, recession, problems within the infrastructure, and competition, B2C were to lose 13% of their clients (like Telus did last year)?
Well. First We have to determine how many customers that is…
clients x 13% = clients lost
23 700 000 x 13% = 3 081 000
Therefore, B2C lost 3,081,000 sales. But how does that affect things? We now have to investigate how much money those clients lost were worth.
Lost Clients x Previous AVC = Client Value Lost
3081000 x 405. 06 = $1,247,989,860
Now that we know how much they lost in revenue, let us look at the effects on revenue and AVC.
old revenue - loss = new revenue
$9, 600, 000, 000 - $1,247,989,860 = $8,352,010,140
old revenue / new customers = New AVC Required
$9, 600, 000, 000 / 20619000 = $465. 59
Each customer only has to increase their purchase therefore by $60.53
Hmm, I am sure they can just hide this in a slight increase in prices, set up fees, and other hidden things (ie. increased text messaging costs)
B2B loses 13% of its Clients.
Now let us see what happens to B2B’s AVC if they were to lose 13% of their clients.
So let us do the equation again!
clients x 13% = clients lost
145 x 13% = 19
Therefore, B2B lost 19 clients. That isn’t near as many as B2C. But how much money do they lose?
Lost Clients x Previous AVC = Client Value Lost
19 x 24, 827.59 = $471,724.21
Now that we know how much they lost in revenue, let us look at the total percentage of affect.
old revenue - loss = new revenue
$3, 600, 000 - $471,724.21 = $3,128,275.79
old revenue / new customers = New AVC Required
$3, 600, 000 / 126 = $28571.43
Each customer has to increase their purchase by $3743.84 if they are to keep the same income. This is much more difficult to hide in the price.
MARKET LOSS BY # OF CLIENTS
B2C loses 10 of its Clients.
So because of poor advertising and not reaching its clients, B2C loses 10 clients… let us see the effect.
Well. First We have to determine how many customers that is…
clients - 10 = new number of clients
23 700 000 - 10 = 23 700 000
Ok so let us figure out the percent of money lost!
clients x AVC = revenue lost/client
10 x 405.06 = 4, 050.60
old revenue - new revenue = new revenue
9, 600, 000, 000 - 4, 050.60 = 9599995949.4
[1 - (new revenue / old revenue)] x 100 = margin of loss
[1 - (9599995949.4 / 9, 600, 000, 000)] x 100 = 0.00004%
For B2C, because it has a higher number of potential clients, a bigger market base, and a much lower AVC they don’t even lose 1% of their income over 10 clients.
B2B loses 10 of its Clients.
Now let us say because of poor advertising not reaching its clients, B2B loses 10 clients… let us see the effect.
Equation time!
Clients - 10 = New Number of Clients
145 - 10 = 135
Ok so let us figure out the percent of money lost!
clients x AVC = revenue lost/client
10 x 24, 827.59 = 248, 275.9
old revenue - new revenue = new revenue
3, 600 000 - 248, 275.9 = 3,351,724.1
[1 - (new revenue / old revenue)] x 100 = margin of loss
[1 - (3,351,724.1 / 3, 600 000)] x 100 = 6.9%
For B2B, because it has a more specialized field of saturation, a bigger market base, and a much lower AVC they lose over 5% of their income, much more than B2C.
SUMMARY
So if we look at what we just calculated:
B2B’s requires more sales per capita than B2C.
B2B = 15%
B2C = 4.23%
B2B’s clients are more valuable per transaction than B2C’s
B2B = $24, 827.59/client
B2C = $405.06/client
Loss of B2B’s sales is more costly on average than B2C’s. If each lost 13% of their sales, B2B has a much higher inflation rate to recoup expenses.
B2B = $3743.84/sale
B2C = $465. 59/sale
The effect of losing one sale is greater for B2B than B2C. If each lost 10 sales, B2B gets hit much harder than B2C.
B2B = 6.9%
B2C = 0.00004%
CONCLUSION: THE EFFECT ON MARKETING
Yes the market for each company is different, but that doesn’t change the importance of sales for B2B.
While advertising may not seem needed by B2B to reach such a wide audience, the data explains that each sale is much more important.
If each sale is much more important, the advertising, and marketing for each sale is more important.
Just because a television campaign may not increase sales for B2B as it would for B2C, that doesn’t mean that their internet marketing presence should not be reflective of the value of their customers.
It is common knowledge that 25% of all budget should be spent on marketing, this is especially the case for a company that must compete with other company’s for a much smaller pool of clients. The fact that one company doesn’t know that you exist can make over ½ a percentage different in your annual income. In the B2B example, that would be the difference of $18, 000. If it were 10 clients, it would 180, 000.
But where do Client’s come from for the B2B. If they have a smaller marketing pool, what helps make the sale – and that is usually that they find you!
Read more on how to make finding you easier in my next article.
