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Dear
Friends,
Every day we are looking to
increase our profitability.
Here is some great advice on
how focusing on your top 20%
of your customers will give
your greater returns to your
bottom line.
Regards
Tony Gattari
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How to Find Your Best and Most Profitable Customers
The 80/20 rule – that
80 percent of your sales come from the top 20 percent of your customers
– applies to most businesses. Nurturing that precious 20 percent means
focusing your marketing programs on the customers who drive your
company’s profitability. A laser-like focus on these high-profit buyers
also prevents you from expending too much effort on lower profit
customers.
Remember that profitability does not necessarily correlate with the
amount of money a customer gives to your business. In many businesses,
smaller sales can be highly profitable, while larger sales can cost the
company a lot to administer or deliver, and therefore have a smaller
profit margin.
4
tips to unearth your most profitable customers
1) Calculate acquisition costs
To assess customer profitability, you need to determine how much it
costs your business to attract each customer. Many small businesses will
be able to get away with a cost of sales analysis that is much simpler
than what larger companies use. Keep in mind that the cost of sales
numbers produced through these calculations are averages, to be used for
rough evaluations of your customer base.
To conduct a simple analysis, first review the effort involved in
closing a typical sale. Be sure to include expenses like a salesperson,
direct mail, Web site development or other advertising costs. Estimate
the total cost of your outreach and divide it by the number of sales you
close annually to do a “quick and dirty” analysis.
2) Calculate cost of customer service
It is important to track your customer service expenses to measure how
profitable your current customers are. The equation is similar to the
cost of sales analysis. Apply costs for service-related items such as
order taking personnel, project manager salaries and delivery of your
product or service to each customer. Estimate the average cost of
servicing each customer by dividing by the number of customers you
serviced during the year. If you need help determining key service
expenses in your industry, ask your accountant for industry standards.
Keep in mind that the cost of service numbers produced through these
calculations are averages, to be used for very rough evaluations of your
customer base.
3) Create a high-potential profile
With the two figures above and the revenue that each of your customer
provides, you can determine a rough sense of individual customer
profitability. You can use this information to develop a profile of your
high-potential customer. Look for common characteristics and behaviours.
Do they fit into specific demographic or geographic categories? Do they
have certain shared attitudes or values? Do they make their buying
decisions in a similar way? This profile will help you develop the most
effective marketing programs to reach these targets, extend their value
to your company, and attract more high-profit customers.
Some businesses might want to go a step further and develop a customer
potential pyramid – a three-segment hierarchy that breaks out the
company’s high-potential, medium-potential, and low-potential customers.
The purpose of this profile is to look for marketing tactics to migrate
customers into the high-profit categories.
4) Reallocate efforts around least profitable customers
In support of your focus on the top 20 percent of your customer pool,
you should make an effort to not attract unprofitable customers. Review
your records for those customers who cost you valuable time and money
and create a profile of them in the same way you built a high potential
profile. To the degree that you can, be sure that your marketing
programs exclude these customers, to keep you efficient and profitable.
Since every relationship is an important link to other customers, try to
avoid alienating anyone by telling them you don’t want their business.
Instead, just avoid focusing resources on reaching them.
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