The first time a recruiter told me how much he would make if he placed me in a role, I nearly choked on my drink. 20% of my first-year salary?!? From the outside, it didn't seem like he was doing much. John had reached out to me over LinkedIn, and I had agreed to catch up. Now he was going to make the amount I earned in two months just for introducing me to an employer? Either I was missing something, or this could be a very profitable side project.
So I went on LinkedIn, found some job ads, and started trying to place people I knew. It took me a week to realise what I'd missed. People are only ready to move roles every few years, which means it's hard to find the right person, at the right time. I later told John about my experiment, and he laughed and told me that he kept tabs on around 300 people at a time. He would catch up with most of them every six months, so that when they were ready to move he would be top of mind. Recruitment wasn't as profitable as I thought because engagement with his service was infrequent.
Products have different inherent purchase frequencies. For example, people pay for toilet paper, haircuts, and coffee very often, but buy houses, change jobs, and sell cars infrequently. As purchase frequency changes, three key variables also change:
- Retention: In high purchase frequency markets, customers are less likely to take on the cognitive load of choosing between competing alternatives each time they make a purchase. This results in increased retention after initial customer acquisition. Do you buy a different brand of milk, muesli, or detergent each time you go to the shops or choose one product from a handful you're familiar with?
- Price: High-frequency purchases tend to be less expensive than low-frequency ones. This makes sense, as 1) customers have limited incomes, and can't afford high frequency, high-cost purchases, and 2) businesses whose products sell infrequently need to cover their costs while making fewer sales - leading to a natural increase in prices.
- Targeting: As purchase frequency decreases, advertising needs to become more targeted, as windows of opportunity when customers are about to make decisions are rarer. This means that less targeted campaigns are less likely to reach the right people, at the right time.
Products with infrequent purchase frequencies have two options to keep customers engaged:
1) Attract customers at the right time - when they're ready to make a purchase
This strategy involves finding a way to target the right customers at the right time, which is harder in low-frequency markets. Examples:
- Targeted Advertising such as Facebook, LinkedIn, or Google ads allow companies to spend marketing money efficiently by reaching the right people at the right time. However, as these channels are available to all competitors margins quickly vanish.
- Content Marketing provides customers with the information they need to make their decision. As customers tend to go looking for this information around the time they're ready to buy, this exposes them to the company's offering at the right time.
- Channel partners allow you to reach potential customers close to the moment of decision. For example, if you wanted to target graduates with resume preparation services, you could advertise through universities.
2) Keep customers engaged with an adjacent, higher frequency product until they're ready to make a purchase
This strategy creates a higher frequency behaviour (often at lower margins) to keep customers engaged so that when they're ready to make a low frequency (higher margin) purchase they go to the company. Some examples:
- Real estate agents have a property management department, and a sales department. Property management is a service to manage tenants at investment properties for either a fixed fee or a % of rental income, while sales assist with the sale of properties for a % commission of the sale price. Property management is generally a lower-margin business than sales - helping to 1) provide consistent income throughout the year, as sales can be seasonal, and 2) keep property owners engaged so that when they're ready to sell they use the same agent.
- Recruiters make a commission of ~10-20% of a candidate's first-year salary when they place someone in a role. Their problem is that job change is a low-frequency behaviour and it's hard to find the right people, at the right time in their career to place them. Services like LinkedIn bridge this gap - keeping potential candidates engaged with high-frequency behaviours (e.g checking the newsfeed) so that recruiters can easily find who they need.
- Banks make very little money on transaction and savings accounts, but a lot on home loans. Daily transaction accounts are a high-frequency, low-margin product that keeps customers engaged until they're ready to take out a loan.
Of these two, building an adjacent high-frequency product is less obvious, and less common approach to building a sustainable business in low-frequency markets. However, doing it successfully not only improves your unit-economics by reducing customer acquisition cost, it also increases revenue through new upsell opportunities.