The Hokey Cokey (or Why Who’s Out Matters as Much as Who’s In)

I recently wrote a piece called On Bananas (or Why Professional Services isn’t as Different as You Think). It took the core of Byron Sharp’s How Brands Grow and posited that the growth patterns seen in B2C and B2B markets also appear in the world of professional services, particularly for law firms.

It included real world data from a number of firms and you can read it here.

One of the teachings in HBG (and the first of Sharp’s rules for growth) is to reach all category buyers. But why is that critical for growth? Why do you need to continually win new clients, rather than just try and sell more to your existing clients?

I thought I would explore that here, again using some real world data from the market research I conducted at Langleys; although the principles and implications are relevant for all categories / sectors.

Simplistically, it all comes down to the size of the market — or more specifically, how many people now are actively in-market for your product or service vs. who’s out-of-market (but might be in-market soon, or later in the future).

Let’s look first at the market for personal legal services across what we referred to at Langleys as our ‘Core Regions’ — East Yorkshire, North Yorkshire and Lincolnshire.

Across those Core Regions there are approximately 1.1m of working age; which is to say there’s a market of 1.1m potential customers for Langleys.

(I won’t go into detail about how we segmented the market and decided who to target — just talking about the whole market will be sufficient for our purposes).

However, only around 17% of the market need legal advice each year, so the market actually looks like this:

The out-of-market population is always bigger than the in-market population

For reference, across those core regions there are 24 law firms that Langleys considered ‘competitors’, although only half of the in-market population use those firms.

The other half use someone else — either a smaller local firm, or a firm somewhere else in the country. (The moral of the story here is that the list of the alternatives in the market’s eyes is much longer than who you think your competitors are. Always think alternatives, as well as competitors)

Suddenly that market of 1.1m people is looking a lot smaller.

For the sake of argument, let’s say your business has a baseline turnover of £10m.

You work out that you can win £200,000 of new revenue from the in-market population (or your specific target segment), and it will cost you £50,000 to do so.

Nice, right? In year one you’ve grown by 2% and your turnover is now £10.2m. Big pats on the back all round.

But what about year two?

Well, remember that Negative Binomial Distribution, the law of buyer moderation and bananas? We know that the majority of clients and customers are light, occasional buyers.

The people who were in-market and bought your services in year one will, in almost all cases, now move into that big out-of-market population.

So you don’t start year two from a baseline of £10.2m.

You don’t keep that £200,000 as recurring revenue; you go back to your original baseline of £10m, as a new 190,000 people move in-market.

And you spend another £50,000 on a marketing campaign to win another £200,000 of new revenue.

And do the same in years three and four.

And in five years your turnover is still £10.2m.

You can, of course, increase your marketing budget in the hope of reaching more people and winning more of the available revenue. But, unless you have infinite resources (which 99.9% of businesses don’t), there will always be resource constraints that bind you to some degree.

Add in those 24 (at least) competitor firms who offer the same services as you and are targeting the same pool of people for the same work, and you start to see how only targeting those who are actively in-market is a recipe for flatlining.

That’s true for the B2C, personal legal services market, but does it hold true in other markets?

Well, let’s consider residential conveyancing.

Across Langleys’ Core Regions there are around 945,000 households — so 945,000 potential customers (around two thirds own their property, so would be a target for buying and selling, vs. one third who rent and would be a target for just buying).

But the same pattern we saw in personal legal services is seen here, only in a more extreme version, with only 9% of the market moving house each year:

The out-of-market population is always bigger than the in-market population

Only targeting those households that are in-market would play out the same as in personal B2C legal services; a nice bump in year one, but then flatlining again in year two and beyond as the original in-market population move out-of-market, and a new 85,000 households move in-market each year.

B2B is, unfortunately, not as easy to collect similar data for. However, we can still draw some educated conclusions from the data we do have.

Across Langleys’ Core Regions there are circa 275,000 of what we called Medium Large Businesses (effectively non-owner managed, general commercial organisations).

Of those, 270,000 of them had a turnover less than £10m. Only 1,000 had a turnover greater than £50m.

Just applying some basic common sense will tell you that only a small proportion of those businesses will need regular, ongoing legal advice each year.

Consider even the largest; how many employment tribunal claims will they face each year? How many supplier disputes will they be involved in? How many acquisitions will they complete? How many property leases will they need to renegotiate?

Think about other B2B sectors / categories as well.

How often do businesses replace their fleet of photocopiers? How often do they implement a new CRM system? How often do they change their pension administrator?

How many industrial air conditioning units will a business need to buy each year, or even every three years? How many office chairs or desks? How many computers?

Even in B2B, the out-of-market population is always likely to be bigger than the in-market population.

And to grow, just like in other markets, you still need to continually increase the size of your client base, which will mainly be made up of lots of clients who instruct you only infrequently.

(For a more detailed look at how B2B brands grow, including evidence from banking, insurance, concrete supplies and commercial airlines, look at this research from LinkedIn and the Ehrenberg-Bass Institute.)

I mentioned in On Bananas that I’m naturally a proponent of the two-speed approach to marketing communications; spend a portion of your marcomms budget on campaigns targeting the relevant segments of the in-market population, and a portion on campaigns targeting the whole market — including the out-of-market population.

Looking at these real-world numbers, you start to see why that makes sense.

As well as capturing current demand from those people who are looking to buy now, you also start to drive future demand from people that aren’t looking to buy now, but might be in due course— perhaps next month, perhaps in six months, perhaps next year.

That gives you the best chance of expanding your client / customer base because, as we’ve seen, the out-of-market population is always bigger than the in-market population.

And building mental availability and brand salience amongst 800,000 people rather than just 80,000 will have a disproportionate impact, particularly when considered over more than 12 months.

Here are some final thoughts on balancing capturing current demand with driving future demand:

1. Because they only target people who are actively looking to buy now, marcomms tactics such as PPC and SEO will, by their very nature, have a narrower, shorter-term, impact. That’s not to say they aren’t useful (we do need to capture current demand after all), but be realistic about what they can achieve.
2. By contrast, your marcomms campaigns that focus on driving future demand will (should) be seen by everyone — those that are in-market and those that are out-of-market. Consequently, they can actually reduce the cost of capturing current demand; the people who move in-market will already know you, be more likely to think of you at the right time, and need fewer prods to take the desired action.
3. For evidence of points one and two, look at companies such as Airbnb, Adidas and UKTV who shifted budget away from narrow, short term marcomms tactics into broad reach marcomms that target the whole market, with impressive results. See also DNV brands like Gousto and HubSpot who have recently embraced TV advertising, and obviously the likes of Facebook, Amazon, Apple, Netflix and Google (the FAANG brands who spend huge amounts on ‘traditional’ advertising).
4. Emotion is the gateway to attention. The out-of-market population aren’t actively looking to buy now, so your campaigns will need to work extra hard to get their attention and, to paraphrase How Brands Grow, build and refresh the right memory structures. This is why creativity, distinctiveness and standing out amongst the competition is so important (see rules four, five and six of HBG’s rules for building brands).
5. Point four above goes a long way to explaining why TV, radio, print, outdoor and online display are typically the go-to channels for generating new demand and brand building. Not only do they generally offer the largest reach, their ability to showcase imagery, sound, language and story are critical for getting people’s attention.
6. Re point four, contrast these with a PPC ad, blog, webpage, social media post or email newsletter. While largely devoid of any emotional impact (which isn’t to say you shouldn’t aim for distinctiveness through e.g. copy and tone of voice), they’re very good at conveying information and fact; which means they’re generally better aimed at people who are likely to pay attention, such as an in-market population who are actively looking to buy now.
7. It’s never either / or — it’s always both.
8. There’s no hard and fast rule about exactly how you should allocate budget between driving future demand and capturing current demand. It will depend on a variety of context-specific factors such as the size of the market, your industry, company life-stage and objectives.
9. At the moment — particularly in B2B and certainly in professional services — there is far less investment in longer-term brand building and driving future demand than in capturing current demand. This means there’s a massive opportunity (because there’s less competition for attention) for those that get the balance right. But move fast, because things will start to shift.

Of course, the data above relates only to the legal services market, although the same pattern is seem time and time again in multiple industries and categories.

With some good quality research it shouldn’t be difficult to find out the size of out-of-market and in-market populations for your particular product or service.

And if they look anything like the examples above, then it’s time to start focusing on the people who are out just as much as the people who are in.