Identify good customers and fire the bad ones
Despite the logical reasoning that is about to be laid out, many businesses and leaders still believe that any customers is a good customer as long as they pay. This is not true and the most successful and profitable companies realize they cannot ‘be all things to all people’. This philosophy of marketing and business operations is and should be a thought of the past.
Establishing target markets and segmenting markets should be a major element of establishing a business strategy for any company in any industry. Target markets are selected groups of consumers that a company sees as a prime market for its products and services. Segmenting markets enables a company to creative groups of customers that are heterogeneous between groups and homogeneous within the groups. Within a market segment, customers should share similar traits, interests, or activities. A company must decide what resources are available and which market segments present the best business opportunity given the company.s strengths and the markets demands.
Okay, so what makes a customer good or bad? To begin with, a customer that fits into one of the identified target segments of a company offers a good opening. The major reason accomplished companies target specific groups of customers is that it offers efficiencies with regard to advertising and communication investment. Maximizing marketing investments is aided when a company can only spend money to deliver its messages through media that are routinely used by its targeted customers. The less advertising dollars wasted the better and the broader the reach within the market, the better.
Some businesses do not always think of individual customers in this manner, but the bottom line is that customers that are profitable are generally good, and those that are not profitable, or rather will never be profitable, are bad. Customer relationship management is a process developed in large part to help companies target market segments, yet analyze customers as individuals within that market. Through analysis of market behavior and profits, companies can often identify which markets are providing the best profit opportunities for various products or services.
How can a customer not be profitable? The answer is really pretty simple. Some customers cost a company more than they give back in return. Most companies are able to take marketing costs, such as advertising, support, and the like, and calculate the cost of acquisition per each individual customer. Customers that are costly to acquire and maintain, and only shop for discounts or sale products and services, are typically not profitable.
Additionally, some customer groups may have exceptionally high demands for service or support that detract from any revenue they provide. Essentially, the resources a company utilizes to attract and maintain a customer (including advertising, service, support, costs of goods sold or delivered) should not outweigh revenues created. This is not a profitable long-term situation for good business.
The best customers are those that create the greatest profit potential for the business. This typically includes customers that are willing to pay premium prices for a company’s products and services and are more likely to develop a loyal relationship to the company. Loyal customers are often good sources of referrals of other potentially good customers. One of the best advantages of an advanced customer relationship management program is the ability to estimate the lifetime value of customers based on frequency, recency, and monetary values. These factors are used to project the potential lifetime value of a customer. Customers can then be placed in tiered categories, ranging from brand loyal to ‘lead weight’
An often used marketing principle, the Pareto Principle, or the 80/20 rule, suggests that all businesses derive roughly 80 per cent of their business from the top 20 per cent of their customers. These brand loyal customers are the key to a businesses present and long-term viability. Effective marketing and growth strategies can often help drive success in second tier customers.
Perhaps the toughest question to answer is, What to do with the customers at the bottom of the ratings. Is it ever okay to turn away business? Well, if business decisions were made with crystal clear vision, customers that are not profitable would be turned away in favor of more beneficial ones. The challenge is spotting these impractical customers. Fortunately, this is something that is more possible given the technology opportunities in the market. Once identified, the key is to subtly force these lead weight customers to either step up or move on. This takes carefully crafted price and product set ups that discourage the customers that are demanding and resource-eaters. It also takes clear marketing and business practices that are designed to benefit the ideal customers.