Increasing profit by understanding customers.

Customers are not all created equalIt’s a simple fact of business life that some customers are better for you than others. But how do you know which to prioritise, which to develop, and which to leave behind in order to improve the long-term profitability of your business?

Here are the four steps to a profitable customer strategy:

1. Establish 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. There may be many contact points, formal and informal support relationships, and there may be a myriad of account-specific issues that take time, or generate costs, from securing initial orders right through to after-sales management. Only by understanding the true cost to serve, and the “pocket price” – the actual price paid after all of the discounts and deals – can you really understand the financial value over a given period, that a customer represents.

2. Match your values

Ask yourself the following questions: How do you want your customers to think of you? What one thing would you like your customers to appreciate most about you? What do you think should differentiate you from the competition?

Look at the types of customer you have, and put yourself in their shoes. Which types are looking for lowest cost? Which are after convenience? Which groups come to you for some other reason entirely, whether that’s a personalised service, a quality guarantee or a personal association? If you’re not sure, ask, but be under no illusion – many of your customers come for reasons other than those you would ideally like.

By understanding what your own strengths are, and comparing them to the priorities of your various customer groups, you can start to understand with which groups your business has most potential, and where the tough battles may lie.

Customer Segmentation

3. Target your approach

Group A: Profitable customers who highly value your specific sources of differentiation. This group should receive more management time to cultivate the relationship, generate service-line extensions, and create templates and referrals for new business development.

Group B: For these customers you are typically just one of a number of comparable suppliers. Valuing your differentiation less, they are more focused on price and more vulnerable to competitor intrusion.

Service to this group should be standardised as much as possible, to reduce cost-to-serve and protect margins. This may be through moving from field-sales to telesales or on-line ordering, reconfiguring logistics or streamlining after-sales support. At the same time though, the group should be continually consulted for service improvements with a view to building more relevant differentiation and creating new Group A customers.

Group C: These customers value your strengths, but cost you money. Increasing price or accelerating business building may shift the account into Group A. Service streamlining may move the account into Group B. Either way, customers in this box must be targeted to shift into one of the others.

Group D: Standardisation and cost improvement may enable some of these to become group C customers. If not, the alternatives are price increases or a polite exit.

4. Capacity and capability

Having split the customer portfolio into groups, the next step is to develop the appropriate capabilities of people, processes and systems, both to cultivate those on the right of the chart, and to productionise those on the left.

Finally, and often most difficult of all, the business must enact it’s plans to tackle, or walk away from, those customers below the profitability line. Key to a successful transition away from unprofitable accounts is managing capacity, especially in production environments. The objective is to migrate towards a more profitable, and more strategically aligned customer base, which means planning the changes, and driving expansion in the profitable groups, so that new volume can replace old volume, and that unprofitable accounts aren’t retained simply to support over-production.

Final Note…

Any business with large-volume unprofitable customers needs to be focusing its attention on building profitable replacements, not in servicing and justifying the current situation.

Large accounts that are unprofitable are often called “strategic” and considered a “must serve” customer or critical to maintain capacity. Treat both reasons with deep scepticism. Many suppliers are incredibly reluctant to lose large accounts, even when they are clearly costing the business money to keep them. This is neither a desirable nor sustainable position.

After all, how would your best customers feel if they knew they were over-paying to subsidise your worst customers?