Start-ups should think twice before adopting Telstra’s new strategy of acquiring customers ahead of profits, according to two business advisors.
More than a million customers returned to Telstra in the six months to December 2010 including 919,000 mobile and 139,000 fixed broadband customers. Despite this, the telco suffered a 36% drop in its profits in this period.
“Last August we announced a strategy to improve customer service, to increase our customer numbers, to simplify the business and to invest in new growth businesses,” Chief Executive Officer David Thodey told analysts on Thursday.
“We recognise the need to translate customer growth into revenue and profitability, but as customer numbers are a leading indicator of financial performance.”
Iain Campbell is the marketing manager at Action Coach, says that whilst the ‘customers now, profit later’ strategy can be an extremely risky approach, it can also be quite effective.
“You would only adopt this strategy if there was a high likelihood of repeat purchases” he says.
“The best example is printing. Epson take a substantial loss on the sale of their printers, but profit from their customers for years afterwards with the sale of print cartridges.”
“Service businesses are a particularly good example. We help clients from business infancy for years and years. If we create a good relationship with them early on, we will most likely work together for years and years.”
Debra Templar, retail consultant and business coach, says that retail start-ups should be wary of this strategy.
“The customers after cheap stuff are always going to be after cheap stuff. As soon as you put your prices up again they’ll leave for someone cheaper” she says.
Templar says she has seen many retail businesses go broke with “lots of people still walking in the door”.
She says: “It’s fine for Telstra – they can afford these types of strategies. But most small businesses don’t have the time and money for it.”
Julia Bickerstaff, founder of consultancy The Business Bakery, adds: “I would only recommend a customers first, profit later strategy to businesses that either offer something highly unique, or when the cost of changing to a competitor is high in either time, money or effort.”
“Despite what the media tells us to do, no one changes banks. Banks will take a loss early as they know they will have years, if not decades, with a customer”.
“Software is another great example. When a business installs accounting software, they will be very reluctant to change as they will have to re-enter all their details and data.”
“It’s too time consuming so they’ll stay with the same software as long as it’s available and still is suitable for their business.”