Identifying profitable customers is essential to a business’s success. Often I hear from financial leaders… “I don’t need to worry about the customers; that’s the marketing and sales team’s job.” WRONG. Everyone in your company should be concerned with your customers because without them, there is no business.
If it turns out that most of your customers are unprofitable, you have a problem. The two most effective ways to address unprofitable customers is by either cutting costs or raising prices.
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Why Identify Your Most Profitable Customers?
So why should you focus on identifying profitable customers? If you are in charge of managing profits and cash flow, you must know your customers. Truth is, not all customers are created equal.
Ever heard of the 80/20 rule? Typically, it is used in reference to productivity. But the reason why you need to identify your most profitable customers is because often, 20% of your customer base makes up 80% of your profit.
There are several things that you need to ask yourself when identifying profitable customers…
- What is your customer segmentation by channel?
- Who are your least profitable customers?
- What products are being bought by most profitable customers?
- What product most often purchased?
- Which are your most profitable products?
- What services are utilized by profitable customers?
- What are the costs (tangible and intangible) associated with profitable customers? Unprofitable customers?
What do you do with the unprofitable customers?
Some indicators that a particular customer is likely unprofitable are abusive behavior to your sales and support team, general aggravation, seeking undeserved credits, requiring more time than the typical customer, and not completing tasks to move along project. Although there are more indicators, this list gives you an idea of what to look for to identify your unprofitable customers.
How to Identify Profitable Customers
An example… in working with one of our clients, we discovered that people ages 45-65 were their most profitable customers based upon the length of time they subscribed to their product. On average, those in that age category subscribed for 14 months. Whereas, those under the age of 45 only subscribed for 3 months. When we worked with our client to calculate cost to acquire each customer and the lifetime value, we were able to make an educated decision to invest in those ages 45-65.
Now that we have identified our client’s most profitable customers, our client puts a large portion of marketing funds to the ages 45-65. A customer outside of that target market is still a viable customer, they just don’t get as much marketing attention the since they are not their primary and most profitable customer segment.
Service Companies
For example, in the service side of our company, we monitor the costs associated with that particular client. If we find that we are spending more than we are making, there are two things that we need to do: figure out why the costs are so high and calculate whether we need to charge more. By knowing our unit economics, we are able to quickly judge whether a client is profitable or not.
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Product Companies
Typically, a product is sold at one price point. Because of that, some companies may fail to look at the profitability of their customers. As we have worked in multiple industries, we have found that there are several areas to look at to improve profitability, including the following:
- Customer Base
- # of Products Purchased
- Demographics
- Lifetime Value of Customers
- Channels
By using these areas, our clients have been able to shift their focus on their profitable customer base (and lookalike audiences) and consequently increase the number of products purchased per customer, decrease refunds, and increase the lifetime value of a customer. Sounds a little bit like marketing, right? But as a financial leader, you must operate in sales, marketing and operations to effectively lead the company forward financially.
Nurture Profitable Customers
If you’re identifying profitable customers, you might see how the company can nurture its most profitable customers. What does your support department do differently with the favorite customers versus those that ruin their day? Partner with your sales and support teams to address how to better nurture them.
How to Deal With Unprofitable Customers
Because there is a limited amount of time in the day, deal with your unprofitable customers and set up procedures to address them to ensure economic success.
Don’t Focus On Them
If you keep giving five star service to those that abuse it and continue to demand or expect excellence, you are going to experience increased costs (and frustration from your service team) associated with servicing that customer. Remove the focus from them.
How would you go about doing this? Encourage your front line employees to provide limited attention. Sure, some customers will leave. But in all reality, you don’t want to keep those customers AND it’s easier than you having to fire them.
Set Boundaries
In the case that you have a client who abuses the kindness of your front line employees, you need to call a meeting to address those behaviors AND set boundaries between the customer and the company. If you’ve been in business long enough, think of that client who did all of the following things:
- Demanded too much time
- Didn’t do what they were told
- Expected more than they were willing to pay for
How is this a financial leader’s role? Make employees feel like it’s okay to do so, and they won’t be punished for impacting the financial success of a company. Show your team the economics, and give them the power to push back against those unprofitable customers.
Increase the Price for a Service
Price is often one of the largest deciding factors for a prospective customer when deciding which firm they want to work with. It would only make sense that to make up for the hassle factor of unprofitable customers, you need to increase the price you are charging for your service. Chances are, if you find them difficult to deal with, your competitors do too and have adjusted their prices accordingly. To learn how to price for profit, download our Pricing for Profit Inspection Guide.
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