I know that seems like a bizarre question particularly given the current economic conditions. However, it’s sometimes worthwhile looking at your customer base and prioritising your efforts on keeping the more profitable segments and letting go those which create less value for your business.
This can be an effective strategy if you’re looking to:
- increase your profit margins,
- cut your costs,
- or plan your marketing campaigns.
If you’re not convinced, ask yourself, do you know if all of your customers are actually profitable and worthwhile servicing? If so which segments offer the greatest margin and what are those margins? If you can’t answer these questions, maybe it’s time you took a deeper look at your customer base.
To calculate which parts of your business deliver the most profit, look at each product line, each service area, or each group of customers. Whichever you choose, evaluate the profitability of each and then assess their long term potential. This potential may not be based on hard numbers, but if you know your business you’ll have a feel for which product lines are facing strong market demand. For a service based business, you should have a feel for which clients are particularly happy with you and who have money to spend.
To help you define an appropriate strategy for each product area / client, consider plotting them on a chart such as this:
Roughly anything in the red area is worth servicing, anything in the other half is worth examining closely to evaluate whether or not to continue with. You might be surprised to find you are servicing some clients where the profit margin and long term prospects are both low. At which point, it’s worth asking if there is value in continuing to service the client. In a services businesses, these factors will typically coincide with a difficult client, which can have the added bonus of impacting employee moral too. This simply increases the case for closing the client account down.
The motivation for this post is that I have personally just been on the receiving end of such a strategy with an insurance company. It was time to renew my policy but the annual premium increased by over 60%. At first I was furious as there was no justification for such a price hike, but then I realised I must fall into the not so valuable box i.e. do not keep. I can only assume this is the case as no sane business would increase their prices by 60% plus and expect to keep hold of customers.
Anyway, it got me to thinking, what else could you do to encourage unprofitable customers to move away from your company? Well, aside from the obvious massive price hike, or simply cancelling their account, you could try… creative answers in the comments please.
Very true but customer service has always been a tricky department to assess profitability. A company’s name is affected by every of its product afterall
I am taking a real close look at what you have produced in the graph, this makes pure sense to me. You need to cater for a market and feed them what they need, its not about what you want but what you market want. My demographics are not even in our demographics for our site, however I have to tune into what is in their needs. You have given me some great ideas, I just wanted to say thanks.
No sane business would hike up the price by 60%, but how many people would not investigate other options and just accept the price rise. I think it works both ways, remove the dead wood and rip off the dead heads.
Maybe the insurance company was trying to boost profits before they had a meeting with their share holders! A sudden boost would look great for investors. I think Fraser has a good point too.
It is true not all customers are good customers – some are a waste of your time. What we do is figure out what they want, who they are and then work out whether we want them. If not we recommend them to our competitors saying that they are probably suited to their way of working…harsh I know but it has to be done to getrid of the time wasters becasue we all know that time is money!
Difficult clients are the worst, an although I’ve tried to meet their expectations when it comes to money I had to cease the collaboration. No only that you don’t gain anything, but it keep tension inside the company and a lot of frustration, and this is worst than losing money.
Sometimes “unprofitable” customers are
customers with much more potential business to give, of course in case if they’re won over. It’s a lot less expensive to grow these customers into profitable customers than to replace them with new customers (who aren’t likely to be any more profitable).
Lisa – I agree entirely. You only have a viable business if you are supplying what the market wants / needs. To help achieve this, put the customer at the heart of your decision making and align everything else to the customer i.e. service, sales, people etc etc.
Fraser – that’s a very good point. It is often easy not to notice small incremental price rises, but 60% is a little extreme. I like your analogy of removing the dead heads to allow the others to grow. Reminds me of a situation we face with our tomato plants right now. Some of the fruit is being eaten by bugs and it’s better to remove the dying fruit to allow the others to prosper.
Harry – I truly hadn’t thought of that, maybe it was a short term decision to keep investors happy which really is a symptom of why the world is in recession isn’t it – short term decision making over long term business need can only ever create unstable businesses.
Sue – I like your thinking. Why not let them waste your competitors time and allow you the advantage of focussing on the customers worthwhile hanging on to. Time certainly is money.
Dan M – bad clients really are worse than no clients in some instances. They can be very destructive to team morale and are more often than not unprofitable in any case. As Fraser says, rip off the dead heads.
AAT UK – yes and you should invest in those customers that have long term potential but who also fit your target customer profile. The last thing you want to do is invest in a client only to find down the line they aren’t a good fit for your business. It is true however that finding new customers is always more expensive than farming existing customers.
That´s true but good customer service is the lifeblood of any business, even if there are bad costumers.
Josefina Argüello
I think most of customers are good.those bad ones just are minor.they wanna get satisfactory service.it’s reasonable.put yourself in another’s position,you will understand better.
“Letting go those which create less value for your business”. Is this great. Thanks.
For us to know if a customer is profitable is first know and study your business. We should be aware of who we are aiming to win our products/services. I believe too that every customer is a good customer, all you need is to target your customers carefully. If your offer a product/service about flower arrangement services of course you wont target customers that are into customizing cars. And of course put yourself too as a customer for us to better understand what is their wants and needs.
If you think for the business perspective then I would say All customer are good customer even if they are wrong.
IT IS NOT COMPLETELY TRUE THAT ALL CUSTOMERS ARE GOOD. SOME TIMES CUSTOMERS ARE NOT READY TO UNDERSTAND THE PROFILE OF PRODUCT ITS SERVICES. BUT THEY ONLY WANT TO SOLVE THEIR PROBLEM WITH DIFFERENT ITEM THAT IS NOT RIGHT FOR THEM.
Thanks for the comment, but no need to shout… I guess you really wanted to get your point across…
Satellite’s point isn’t that great, but the “yelling” it definitely got me to read it.
We should always think that every customers are good that’s the basic since we want to earn money from them. The chances are always 50-50, they might buy the item and might not.
Yeah, the days of “the customer is always right” is long gone. I was recently dealing with a potential client that had champagne taste with Diet Pepsi budget.
I finally recommended that they look at other companies that meet her needs. Sometimes the headaches are not worth the additional revenue.
To send bad clients away is a must if you want to stay as self employed… everyone gets these clients now and then…
i am in agreement with some of the commentors that not all customers are good ones. Don’t get me wrong, i would never turn away a customer, but some are very time consuming and not always the most profitable. But custom is custom!
Best way to send bad clients away, politely is to HIKE prices and make a justification for it (+ my time $200 per hour). Worst case scenario, they client ends up paying.
Totally agree with Abe Trader (above). A increase number of customers = more headaches and more expenses with customer support. Make sure you have a great product and people know it’s value. Apple did it.
Great graphic. It took me a while to fully understand the trade-offs but I get it now. Thanks for posting it.
Totally agree all customers are good ones. Don’t get me wrong, But the basic since we want to earn money from them.
Great post, I didn’t know that myself. It took me a while to understand the graphic as well and I hope I got it right but again this was a real eye opener, thank you.
Hey, more customer means more sales and more income. Sure it comes with a headache but what do want? Succeed and not working a bit for it? It doesn’t work this way. There are advantages and disadvantages just like in any business, you prefer not customers and no sales or reputation? I prefer the customers…as long as they pay.
Thanks Andy for directing me to this article. I’m not really good at graphs so I had to look into this chart for a couple of minutes but I got what you say:)
I think the question you asked comes inevitably into one’s mind as their company grows. As we started, we were ready to serve 15-dollars order hoping that the Customer will be back for more. In some cases, our hopes were justified – we have a couple of people having over $5K total (we are a retail company so 5K from one person is a big number), with separate orders each worth not more than $50. But in most, I hate to tell this, it was a waste of time.
Simple calculation makes it obvious – if one order is less than the cost of work of a support representative per hour but the Customer demands an assistant to be with him on the phone for an hour, who wins?
I also would love to complain at some consumer rights protection laws, but I won’t do it here:) Service-oriented business will understand what I mean:)
My point is that if the company wants to grow, some customers may be left over the board, and it’s as natural as evolution. I would even say it is as simple as democracy – you sometimes need to sacrifice the interests of minority for satisfying the interests of majority. And your own.
I think that it definitely makes good business sense, particularly for certain types of businesses, to look at your client list and figure out who is a valuable contributor to your bottom line and who is dead weight. This is particularly true if you have the type of business where you have limited time to spend with customers. For instance, if you are an individual who is running your own sales business. Why keep setting aside time to spend with a customer if they are not purchasing? You certainly can’t keep a business running that way.