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The
Customer Bell Curve
We
are hearing more and more about Customer Retention
these days which is absolutely critical to the
survival of our business. However, this doesn't
mean we have to retain every one of our customers
nor treat them all the same way. In fact, this
article will discuss how to segment your customers
and focus on the more important revenue generating
clients.
We've
all heard about the 80/20 Rule which states that
80% of your revenue comes from 20% of your
customers. Unfortunately, this rule is often times
too true for many businesses which is not very good
since it could put us in a volatile situation.
All that has to happen is that we lose one or two
of our top customers and there'll be a huge negative impact on
the majority
of our revenue. So, we don't want to put all our
eggs into the proverbial basket. Most companies are
aware of this and at least try to avoid it.
But,
have you heard of the 80/20/30 Rule? That's the
80/20 Rule with an additional twist - 80% of your
COSTS come from 30% of your bottom customers.
Notice that this
isn't your top revenue generating customers, but your bottom
non-revenue generating ones. This means that
most of your costs; for time, resources, support,
attention, etc, is wasted supporting the 30% of
your customers who are not generating any revenue
for you,
or at least not enough to give you a return on
your investment. So why are you spending so much
time on your non-revenue generating customers? Is
it possibly because you don't know who they are?
Let's
review what this model looks like and identify a
huge opportunity for your future business as well
as your relationship with your clients. As you can
see from the diagram below 80% of your revenue
is coming from 20% of your top clients, depicted
by the left side of the bell curve. Likewise, 80%
of your costs are going to 30% of your
lowest customers, depicted by the right side of
the bell curve.
This
leaves 50% of your clients in the middle, who may not necessarily
be your largest accounts but neither
are they draining your costs at no return. These
clients do generate revenue for you and are, in
fact, the life-blood of your business - They are
the Hot Spot. Therefore, this middle position of
the bell curve presents a huge opportunity in
which you should focus. They represent 50% of your
clients and they are worth a fortune to you if handled
properly.
You
obviously know the 20% of your top performers so
it's easy to continue working on developing those
relationships. The challenge is to identify the
bottom 30% that are costing you so much in time,
resources, support, etc. By collecting information
about your clients; such as purchase history,
support costs, sales calls, and other related
activities and metrics, you will be able to
determine which customers are, quite frankly,
draining you dry.
Once
you identify the bottom clients you need to stop
spending so much time with them. That may be hard
to do since your sales people may have
long-standing relationships with many of them, or
the client may feel they have a good relationship
with you. But you have to bite the bullet and
focus on the 50% clients. One way to start
"moving away" from the 30% group is to
offer them a service agreement where they pay an
annual fee for support from you. Or charge them
for each support call. Or offer a self-service
web site where they can find answers to their
questions for free without wasting your time. Or
simply stop scheduling sales calls with people who
purchase nothing from you, and never will. You
know the types -- they keep meeting with your
sales reps and holding out a carrot that they will
eventually buy something, but keep delaying the
decision for some unsubstantiated reason. Or they
keep calling with questions and problems and you
give them free support, but in return they haven't
purchased anything from you for the past 2 years
and show no signs of buying anything soon, either.
Now
what do you do with the 50% Hot Spot clients? This
is where you focus most of your marketing and
sales efforts. These are the clients in which you
target your marketing campaigns. Depending on
their purchase history, frequency and timing, you
can send them various offerings for new products,
develop up-sell and cross-sell opportunities, and
enhance your existing relationships. Your sales
team should visit these clients and develop
long-term relationships with them in order to
build their trust in you and your business. These
are the clients you want to establish a
partnership with as a trusted consultant and
provider of solutions. By getting to know these
clients better, as well as their business' needs
and requirements, you will develop a customer
relationship that will last for years. This
connection will generate on-going revenue for your
business and continued solutions for your client,
hence a life-long customer relationship.
If
you don't know your customer profiles you won't
know if you are spending the appropriate time and
resources with the right clients, thus resulting
in an 80/20/30 scenario. So identify and profile
your clients. Using a CRM (Customer Relationship
Management), SFA (Sales Force Automation), or
Contact Management product to help collect and
manage this information will be extremely helpful
(click here for information on GoldMine).
Continue supporting your top 20% revenue
generators. Move away from the bottom 30% by
offering alternative fee-based services, or just
stop interacting with them. And, most important,
start loving your middle range clients with ways
to help them improve their business, eliminate
their pains, and become more successful.
Do
you know what your Customer Bell Curve looks like?
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