I’m not talking about employees!
Right now, you may be missing out on one of the most overlooked paths to improving your profitability (that you’re probably not even aware of.) Now that I have your attention, let’s dig a little deeper into what I’m talking about.
Remember, it’s not all about increasing revenue and driving more sales. Here’s why…because your company is only as good as making payroll next week…right?
What good are the sales if those customers who generate the revenue are draining away your profits and in some cases actually costing you money to serve them?
- Do you know who they are?
- How do you identify which customers to HIRE?
- Which customers to FIRE? (Believe me, we all have a few)
Since we understand the importance of conducting this exercise, the key question is how often do we go through this process to identify the ‘pain factor’ with our customers and clients? Right now is a good time, so let me share a few ideas on how you can determine who to go after and who to ‘stay away from’ or in some cases FIRE!
Let’s begin with marketing; identifying which customers represent the greatest value (you have to determine this first) to your business helps you develop an effective marketing plan and put in place marketing strategies and techniques to:
- Attract customers who have similar characteristics to your most valuable customers.
- Retain your most valuable customers and keep them investing in your products and services over and over again.
- Increase customer ratings on the characteristics most important for your success.
Also, it’s important to note every business is different and based on where your business is at; you may place a higher value (or rating as you’ll see by my chart included in this article) on certain items and lower value or emphasis on others.
These will depend on your strategy. For instance, if you’re launching a new product, your plan might be to build sales as quickly as possible and obtain plenty of testimonials, whereas if you have cashflow problems and not making payroll, you might value customers who pay you up front.
Key aspects (this is not an exhaustive list) to look for when creating a process for identifying your MVC’s- Most Valuable Customers may include:
Average Customer Revenue
This is the average revenue or sales volume over a year. Calculation = Total revenue / Total (active) Customers.
Once you determine the average customer revenue, then you can look at each key customer and see if they are spending more or less than the average. Overall your objective should be to increase your total average customer revenue each year.
Look at whether your customers are increasing their business with you each year, such as investing in additional products or increasing the frequency of their purchases of your products or services.
Average Customer Profit (Margin)
It’s safe to say that we all want customers who are as profitable as possible! These questions may help you determine what ‘profit’ means to you-
- Do they have money, and do they pay you?
- Do they drain your staff ’s time and energy? (Pain Factor)
- Do they invest in high-margin products and services?
- Do they pay full price without negotiating discounts?
- How many small orders/how many large orders?
- Do they order and then return products often?
How loyal is the customer?
Look at how long they have been a customer of yours.
Would it be easy for them to switch to a competitor or another leading authority besides you?
Center of Influence (COI) Strategic Value
This relates to how important this customer or customer group is to the future of your business.
- Do they provide referrals, but maybe not invest a lot of money with you?
- How influential are they in your industry?
- Do they have money to pay you?
This relates to how reliable your customers are with regard to their payments, do they pay on time? This is important as it affects your cashflow and also ties up money that you could be reinvesting in marketing your business.
Cost to Serve
This relates to the service costs involved in getting a sale or after a sale to ensure customer satisfaction. This exercise should be done for each product/service that you offer your customers. Ideally you want minimal service costs for your business while maintaining a high level of customer satisfaction.
For example, if you provide a service but it takes you twice as long to provide the service for a particular customer versus an average customer, then this may be a customer that is of lesser value to your business.
Once you have determined what the most important aspects of your customers are (based on where you’re at today in your biz), you can create an MVC matrix. By simply answering two simple, but effective questions, you’d be able to ‘plot’ each of your customers to determine your MVC’s and which customers you should strongly consider Firing!
- On a scale from 1 to 10, rate each of your customers by revenue generated (1 low, 10 high)
- On a scale from 1 to 10, rate each of your customers by the pain factor discussed earlier in the article (1 difficult, 10 easy)
Your matrix may look something like this, pay attention to the ‘sweet spot’ in the upper right quadrant and the ‘not-so-sweet spot’ on the lower left quadrant. Getting the idea here?
The final step is to create your ‘A, B, C’ rating guide for your customers. This may be something as simple as an Excel spreadsheet or Google sheet with the column headings I reviewed in this article.
By going through this exercise, you may determine that some of your highest revenue customers might be your least profitable. You may even find that there are some customers you would be better off without.