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Measuring
Customer Profitability
Apply
the right resources to leverage customer retention
How does
a business measure the profitability of their customers? It’s not easy.
You can look at what they just bought and compare the revenue from that sale
to what your cost was to make that sale, resulting in your profit. Or you
could consider what long term value that customer will have with you and
compare that revenue with the costs associated with keeping them as a
client. Or you could simply guess (although I must advise against this
method). However you do it, or don’t do it, it’s important for a
business to understand how profitable their customers are and plan their
sales and marketing efforts around that critical customer information. After
all, you need to generate a healthy ROI for your business to survive and
thrive.
Color My
World
A very
simple way to track profitability is to color code each client. Whether your
client list is managed in a spreadsheet (Yuck! The thought!) or in a CRM
product (highly advisable), you can assign a color code to each client’s
profitability level, or even just a letter or number code. By doing so, you
can select out those that are most profitable and prioritize your marketing
and sales activities and resources around their needs. The lower the
profitability index (color, letter, number) the less resources, energy,
time, money, etc you spend on that client. This form of smart spending will
give your valued customers what they need while giving you a better return
on your investments.
You can
do what the airlines do by assigning service tiers based on usage. The more
miles you fly, the better service tier you are in and, hence, the more perks
you earn. This has the affect of keeping customers longer, since they want
to collect all those points to redeem for free stuff (e.g., a flight to see
Mom on her birthday). However, don’t confuse longevity with profitability.
They could simply be staying with you as a client because they figured out
how to work your system but generate little profitability for you.
Best Buy
learned this the hard way. Many of their so called “long-term” customers
figured out that they can buy products, apply for rebates, return the
purchases, then buy them back at return-merchandise discounts. Or, they load
up on severely discounted merchandise designed to boost store traffic, then
sell the goods at profit on eBay. Or, they slap down rock-bottom price
quotes from the Web and demand that Best Buy make good on its lowest-price
guarantee. So Best Buy recently changed many of their policies, such as
charging a re-stocking fee for returned items and cutting back on promotions
and sales tactics that tend to draw in these unprofitable customers. They
are also stocking more merchandise and providing more appealing services for
their more profitable customers.
The
Balancing Act
When
focusing on your profitable customers, you want to avoid assigning
fixed-costs to the resources you apply to develop their loyalty. Fixed-costs
tend to map to your company’s choices, not the customer’s. So you may
miss out on delivering the types of services your customers want and need.
Your costs may vary depending on the customer type, the loyalty program, or
the amount of profitability of each client. Likewise, Marketing expenses
also skew your measurements since many marketing campaigns reach out to
unprofitable customers (for help with calculating how many leads are needed
for your campaign and how to measure the results of your campaign, click on www.peaksalesconsulting.com/downloads.htm
to download a free Marketing Program Investment Calculator).
Once
you’ve analyzed your clients’ purchasing history (amount purchased,
costs, profits, frequency, volume, etc.) to determine their profitability,
you can measure the “value” of each customer. When their value is
established you can assign, or un-assign, resources accordingly. There is a
careful balancing act you have to play here since you should try to apply
just the right amount of resources to get the best return on your
investment. Apply too many resources to an unprofitable client, and you’ve
wasted money. Apply too few resources to a valued client, and you risk
losing them.
More
importantly, the balancing act has to be played with the different types of
profitable customers. Customers with a high present value (just made a large
purchase from you) are not the same as those with a high future potential
(they’ll keep buying from you over time). It takes more than just
measuring their worth by the number of products you just sold them or the
amount of revenue generated from one sale. It’s more about the
customer’s Life-Time Value (LTV).
Many
businesses don’t spend enough time and energy developing customer
retention strategies to build loyalty and long-term relationships after the
sale. As a result, you make a single sale and never hear from your client again. Typically, that’s because
your client never heard from you after the sale either. It's your
responsibility to keep in touch with your customers and maintain a
relationship. The effect of customer retention can be dramatic.
Just a small increase in retention can make a huge difference in your bottom
line. However, you have to make sure you are retaining the right,
profitable-type customers.
Fire the
Bum!
So what
do you do with the not-so-profitable customers? Firing them is a little
harsh, but the intention is right. By reducing your costs (to sell, market,
support, etc.) on non-profitable customers, you won’t necessarily save
money because you will end up reallocating that money to pay more attention
to your profitable customers. Thus, you’ll spend the same amount but with
a higher ROI.
As to
your non-profitable clients, ignoring them doesn’t always work since the
outcome could be bad feelings and negative press about your service
policies, customer care, etc. Also, you never know when one of them may
start buying from you if their needs change, they get different management,
or whatever. What you can do with them is direct them to resources that
don’t cost you a lot of money. Instead of spending costly marketing
dollars on them or wasting valuable sales resources, route them to lower
cost alternatives such as your web site, which could answer questions about
pricing, product features, availability, technical issues, etc. Perhaps you
could charge them for service calls instead of supporting them for free.
Offer them an annual service agreement where they’d be able to contact you
a certain number of times a year at no additional charge. Also, simply stop
wasting valuable sales resources by making useless sales calls and visits
that don’t turn into sales.
You can
even use your phone system to avoid human intervention by using automated
voice activation to route them away from your more valuable resources while
addressing their concerns automatically (punch in your account number to
listen to your payment status). The airlines do this all the time with
flight information. When you call the airline to check the status of a
flight, you never talk to a live person, but you easily get an answer to
your question simply by entering your flight number. Whatever you do with
your unprofitable customers, affordably keeping them around could be
beneficial since they could become a profitable customer in the future.
Tracking
the profitability of your customers will help you better manage your
business while improving your customer retention. It requires understanding
who your more profitable customers are so you can pay more attention to
satisfying their needs. It also requires knowing who your unprofitable
customers are so you don’t waste valuable time and resources on
non-revenue generating activities. Measure profitability, adjust
accordingly, improve your ROI, and keep your good customers coming back for
more.
Good luck and
good selling!
Russ
Lombardo
PEAK
Sales Consulting
russ@peaksalesconsulting.com
(702)
655-5652
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