In a recession, most firms appreciate each and every customer that sticks with ’em. That mindset can hurt you.
Sure, it seems logical enough: If you focus your energy on keeping as many customers as possible, when the market rebounds, you’ll be in a prime position to boost business and grow.
But there are customers and then there are good customers. And if the vast majority of your customers don’t fall into the latter category, the damage can be greater than you think.
In fact, Larry Selden, a Finance and Economic professor emeritus at Columbia, believes the bottom 20% of customers can drain profits by at least 80%.
Focusing on your most profitable customers pays off: Selden says the top 20% of customers can produce up to 150% of a company’s profit!
Sure, that’s easy enough when you’re comparing your largest — and always punctual — account to your smallest, late-paying one. But things are seldom that cut and dried. Research has proven that standard customer categorization, by metrics like demographics or geography, don’t give companies a clear enough picture of exactly who the most profitable customers are.
Digging deeper and rethinking your system
If you want to narrow your focus on only the most valuable customers, it will take extra time, effort and probably cash before you really start seeing results — around six months to create a good customer-profitability analysis. But the long-term profits will greatly outweigh everything you put in up front. Here’s how to start:
There are a slew of sophisticated Customer Relationship Management (CRM) systems out there designed to analyze factors such as cost data, records of individual transactions, detailed customer demographics, etc., and rate your least- to most-profitable customers. To take it a step further, you can even split those customers into subgroups based on their similar needs — buying patterns, behaviors, other customer info, etc.
With a more detailed picture, it’s easier to see which customer relationships need to be altered … or ended altogether.
Cutting the fat
Whether it’s the buyers who’ve been granted discount after discount for years or the perpetual late-payers who swear they’re planning to step up soon, most firms have at least a few customers that are more of a headache than they’re worth. Experts believe that — for most businesses — around 30% of customers are not profitable.
With more concise info at your disposal, it’s easier to reach out to the customers that are holding you back and use numbers to illustrate just why the relationship isn’t working. After all, numbers don’t lie. But severing ties isn’t your only option. You can work with said customers to revise the current arrangements. For example: Do certain customers regularly request overnight delivery when it’s not a necessity? Consider switching to a slower, less expensive shipping method.
Of course, not all customer relationships are worth salvaging. When the cost of hanging onto a customer clearly outweighs any future profits — even when the economy bounces back — it’s time to let go.
Once you’ve made adjustments and trimmed the fat, it’s time to take the relationship with your most valued customers to the next level.
More than just a customer
Focusing on profitable customers takes a more pressing tone in today’s environment. Experts like Consultant and MIT Senior Lecturer Jonathan Byrnes believe once this practice takes hold, the most adept customers will naturally team up with the most adept businesses to grow and become more powerful — leaving other companies that are weighted down by unprofitable customers in the dust.
The key: going beyond the traditional customer/supplier relationship. When you decide to focus on the better customers, the relationship should morph into more of a partnership, where you collaborate (streamlining the supply chain, etc.) to increase each other’s profitability. As an indirect benefit, you’ll also be positioning yourself as indispensable in your customer’s eyes.