How to Identify Your Most Valuable Customers
This past month, there was a “shocking” news item from two well-known, billion-dollar corporations. Both Home Depot and Lowes reported that if they gave customers better service, they could increase their profit. This has long been supported by studies which show a majority of consumers will spend more money at companies that give great service.
Small-business owners of growing companies already know this and work ensure that the entire staff focuses on it. However, not all customers are “created equal” and should not be treated the same. The key is to focus a company’s service efforts on the customers who add the most long-term value to the business.
To identify who those customers are, you need to evaluate their value in seven key areas:
1. Sales minus cost. Most companies rank customers' importance by the amount of sales they do with their company. Unfortunately, this leaves out a key component of the equation. While a customer can do a lot of business with a company, the cost of doing those sales has to be added to the overall equation. Many customers provide a lot of revenue, but the cost to fulfill those sales sometimes exceeds their value.
2. Revenue timing. Not all revenue is created equal. If the business sells consumer electronics, it probably already makes a lot of revenue in the fourth quarter when everyone is shopping for the holidays, but could use more in the first quarter. Sales that come in off-peak seasons may be more profitable because they fill unused production capacity or may be done at a slightly higher price.
3. Referrals and buzz. In the age of the Internet, consumers believe more in earned media like peer reviews, posts and tweets than in corporate advertising. If a customer is willing to be an evangelist of a company and spread their satisfaction story, it can be a powerful endorsement. Sarah Robinson, in her hew book, Fierce Loyalty, shows how incredibly profitable it can be to unlock the potential of the successful fans in any business.
4. Retention. It is, of course, less costly to retain the customers a company has than to seek new ones. Unfortunately many businesses are so busy attracting new customers to come to their front door, they don’t take care of the customers leaving out their back door. A customer who has been with a company over a long time in general is more profitable, typically buys additional products and becomes an evangelist for the brand as discussed in value No. 3.
5. Add-on products or services. Customers who buy more than one product from a company are more profitable because the cost of acquiring that customer is now spread over a larger sales base. For example, Amazon has been able to expand into other business lines since customers know the efficiency of their customer service. Many customers shop for products elsewhere and then buy on Amazon.
6. The customer’s brand. This is especially valuable to small companies. If they do business with a well known brand, they can build their reputation based on it. If Oprah Winfrey buys a company’s product and talks about it, orders shoot through the roof.
7. Feedback. Although social media makes it easier, most customers never tell a company what they think about its product. Typically only the top 10 percent (very satisfied) and the bottom 10 percent (very dissatisfied) share their thoughts about a company’s service. Any customer willing to share his or her opinion with a business is very valuable.
Barry Moltz is author of several books, including You Need to Be A Little Crazy: The Truth about Starting and Growing Your Business and Small Town Rules: How Small Business and Big Brands can Profit in a Connected Economy.