Post by Patricia Hewitt, contributing Women On Business writer
Ask most people in business about their best customer and they’ll probably tell you about age, income, buying preferences or business problems that require solving and industry profiles. It’s rare that I come across someone who talks about his or her best customer in financial terms.
Of course, one could say that our best customer is always someone who buys the most products, but is that the whole picture? What about the cost of selling and servicing your clients, replacing lost clients, the value of a customer relationship over time, reference ability, and influence over product development? All of these things influence profitability, and getting to know your customers from the perspective of profitability is a key element in building a sound, sustainable business.
Customer profitability analysis is important to any business. For example, delivering profitable services has a great deal to do with managing cost since spreading a company across a diverse client spectrum can dramatically impact expense structures. One can also compare this to the success that “category killer” stores have had competing against general department stores. By focusing on specific types of inventory, retailers are able to manage costs more efficiently, which in turn, allows them to create a reputation for value and expertise that sustains sales activity.
How does a company actually calculate customer profitability? While there are plenty of very complicated ways to accomplish this, it can be boiled down to understanding three main drivers: First, determine if you are going to approach this from a customer perspective or customer segment perspective. Next, figure out how much time and money is spent on this category. Finally, project as best you can, how much money this customer is going to spend with you over time. Have your financial expert resources put this information into a spreadsheet for you and make sure you vet your assumptions carefully through at least one objective resource.
Now that you know what your most profitable customer looks like and how their spending affects your profitability, you can apply this information against your existing business model and see how well you’re doing attracting and retaining your best customers as well as defining areas where your costs are negatively impacting profitability.
Additionally, here are a few more questions to put up against the data you’ve analyzed:
- How do you acquire customers and are your acquisition methods targeting the most profitable customer segment?
- What is required before a sale is closed for a given customer? Are you protecting yourself from unnecessary cost before any revenue is realized?
- If you offer custom products, are you making enough profit to warrant their expense?
- What do your servicing or maintenance costs by client look like? Are you servicing all clients at the expense of your most profitable clients? Should you automate certain customer service functions or offer self-service options?
- If you support multiple delivery channels, have you aligned your fee structure according to your desired margin structure for each channel?
One of the great benefits of accomplishing this analysis is providing your company with the data that will allow you to say “no” to opportunities, certain customer requests, and sales strategies. The ability to turn aside from short-term revenue and focus on long-term revenue is what separates good companies from great companies. The challenge in this type of business analysis is getting it done the first time. Once you’ve leaped over that wall, you can incorporate new figures on an annual basis and use this data to help you drive strategic decisions and build a better customer.
Susan Gunelius
Susan Gunelius is the Founder and Editor-in-Chief of Women on Business. She is a 25-year veteran of the marketing field and has authored ten books about marketing, branding, and social media, including the highly popular Ultimate Guide to Email Marketing, 30-Minute Social Media Marketing, Content Marketing for Dummies, Blogging All-in-One for Dummies and Kick-ass Copywriting in 10 Easy Steps. Susan’s marketing-related content can be found on Entrepreneur.com, Forbes.com, MSNBC.com, BusinessWeek.com, and more. Susan is President & CEO of KeySplash Creative, Inc., a marketing communications company. She has worked in corporate marketing roles and through client relationships with AT&T, HSBC, Citibank, Intuit, The New York Times, Cox Communications, and many more large and small companies around the world. Susan also speaks about marketing, branding and social media at events around the world and is frequently interviewed by television, online, radio, and print media organizations about these topics. She holds an MBA in Management and Strategy and a Bachelor of Science degree in Marketing and is a Certified Professional Career Coach (CPCC).
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