You can’t know too much about your customers. They represent the company’s future. One of the most common mistakes made is to assume they all want the same things or they are all equally important to the organization. In Islands of Profit in a sea of Red Ink, Jonathan Byrnes reports on his empirical research across many industries. “Forty percent of the average company’s sales activity is unprofitable.”
Does the 80/20 rule apply to you?
When I work with banks, I tend to find that a very large proportion of their profit comes from a relatively small number of accounts. Most clients admit to the 80/20 rule of profitability with the majority of profits (80 percent or more) coming from a handful of customers. Some clients don’t really know.
You would think every business leader who heard about the opportunity to analyze customer profitability in a manner that enables increased short-term profitability would be running to get in line and learn more about this important business concept. You would be wrong.
Why don’t companies analyze their customer performance?
Alas, business in general has been slow to adapt these principles. According to Byrnes, “This thirty-year-old concept has been adapted to various degrees, but it’s still a very open playing field.” Why are companies slow to adapt? It isn’t because there aren’t worthy results. Byrnes told me in an interview, “It’s not unusual to double the profits of a company within a year or two. We know of one company that tripled its stock price within two years and had 40 percent profit lifts in the places where it had initiatives. The results are really very fast and striking; however, they seem confined to a relatively small number of companies.”
What Byrnes sees is that the best performers push themselves to get better and the rest wait. Sometimes they are well down the slope of gravity before they realize it. At that point it may be too late. “The companies that are lagging usually don’t pursue the idea, possibly because they are unclear how and don’t appear to want a lot of help.” This further polarizes industries with leaders moving ahead on profitability by a wider margin.
Who gets the best customers?
Byrnes says, “The real question is who gets the best piece of the market, who gets the customers that are not price sensitive, who gets the customers that have high growth, who gets the customers that are relationship buyers, who gets the customers that have the right order pattern and the right operating fit so that you get extremely high profits even for the same revenues? Some companies are going after the best customers by using data to identify the profitabiliity of customers.”
If the leaders of a given company were not trained to ask questions about customer profitability because the capability to provide good information didn’t exist, they may not think to ask or may devalue its importance. That is what causes business to maintain a status quo, even if it is no longer working.
Which of your customers are generating profits?
It may not be the ones you think. We ask our clients to look at where historical profits come from. The biggest customer may not be the most profitable one. The company may have given too big a discount to win the business or be jumping through all kinds of service hoops that tie up resources and have inordinate soft costs tied to them that are hidden in the P & E.
This is one topic that no organization can afford to be “skinny-dipping” with. Anecdotal information is just not enough to move the business forward profitably.
As important as it is to know which customers generate profits, it is not the only important data point. When working with clients we slice and dice customer information in a lot of ways that aren’t typically tracked or analyzed. Three more questions every business needs to be able to answer about their customer base are:
1. What criteria do customers use to make their purchase decision?
2. How does your organization stack up compared to your competitors?
3. What problems do customers have that you can help them solve?
Here is a list of 14 things every growth oriented business needs to know about their customer, of which customer profitability is one.