Four simple steps for profitable growth.

All customers are not created equal

Not all customers are created equal, and it’s often the case that the least valuable customers take a disproportionate amount of time and effort to serve and retain. One CEO I spoke to recently estimated that 75% of his support team’s time was being taken up by the least valuable 25% of his customers.

So how do you know which customers you should invest in and develop, and which you should drop down the order of priority? Here’s a simple four-step process to segment your customer base, so you can focus your time and energy on the ones that will help you grow.

1. True profitability

The true costs of servicing a customer are often hidden, especially in large business-to-business environments. There may be complex terms, rebates and over-riders, and there may be a myriad of account-specific issues that take time or generate costs. Only once you understand the true profitability of each customer, after all the costs, discounts and deals have been added in, can you know which are most valuable.

2. Strategic fit

Different customers will come to you for different reasons. Some might see you as the cheapest, the most convenient, the simplest to do business with. Others might value your service or expertise far more. Your strategy should focus on the strengths you intend to develop to differentiate yourself from the competition, distinguishing those elements where you want to be the best in the world, from those ones that you’re happy to be in or behind the pack. Customers with the greatest strategic fit, are the ones who value and will happily pay for, those things you do far better than anyone else.

Customer Groups

3. Segmentation

Plot some examples of your customers on a chart with two axes: profitability and strategic fit. Use those two axes to create the four quadrants in the picture, then set out clear action plans for each of the four segments that emerge.

4. Action plan

Group A: Your ideal customers are the most profitable ones who most value your unique strengths. Invest more management time to cultivate the relationship, generate ideas for new products and services, provide referrals for the sales team, and an “ideal” profile for new business development.

Group B: For these customers you are just one of several alternatives. Valuing your differentiation less, they focus on price, which makes them more likely to switch to competitors at any time. Your service to this group should be standardised as much as possible, to reduce cost-to-serve and protect margins. This might mean moving from field-sales to telesales or on-line ordering, reconfiguring logistics or streamlining after-sales support. At the same time though, you need to keep marketing the added value to this group, mining them to find new Group A customers.

Group C: These customers value your strengths, but cost you money. Increasing price or growing their volume might shift the account into Group A. Or streamlining the service could move them into Group B. Either way, the aim must be to move all the customers in this box into one of the others.

Group D: These are the least profitable customers with the weakest strategic fit, and if you’re anything like my CEO friend, they’re consuming far more of your team’s time than they’re worth. Whatever volume they might represent to you, keeping them as they are will slowly and inevitably strangle your business. If you can’t persuade them to value your unique strengths, put up your prices and let them walk if they want.

BOTTOM LINE: If you were to fire all of the customers in group D, and channel all the time and resources that they consume into finding and growing more Group A customers, how much more profitable do you think your business would become?