Want More Profits? Focus on Your Best and Worst Customers
Pop quiz: Do you want more customers, or just better customers?
You’re welcome to dispute my answer (the comment section is below), but of those two options, I’d pick better customers.
Here’s why: Not all customers are created equal. While it might sound great to have one thousand $10 customers, you could do just as well (or better) with ten $1,000 customers.
And actually, you might end up doing significantly better with a small-but-more-valuable group of customers.
There are a couple of reasons for this:
- Your overhead would be lower. Every customer requires a certain amount of resources.
- You’d be less likely to have bad customers among that tiny group of ten.
- Those ten great customers would be more likely to refer other customers like themselves. Less valuable customers are more likely to refer more low-value customers.
- Those ten great customers would be more willing to buy even more from you, especially compared to what the smaller customers would buy.
Sounds like a great little group of customers, right?
Well, you may already have them. If your business is big enough to have a few hundred (or even a few dozen) customers, you’ve probably got a few super customers already.
It’s because of “The 80/20 Rule.”
The 80/20 Rule, as known as Pareto’s Principle, is a “power law” of mathematics. That means – for starters – that it tends to show up in any system. From gardening to marketing automation, from taxes to customer service.
The basic definition of the 80/20 rule is that 80% of your results come out of 20% of your efforts. The principle was discovered by Italian economist Vilfredo Pareto. It was made popular more recently by two business books: “The 80/20 Principle: The Secret to Achieving More with Less” by Richard Koch and “80/20 Sales and Marketing: The Definitive Guide to Working Less and Making More” by Perry Marshall.
The idea of 80/20 might at first seem interesting. But it gets positively enticing if you take it another step – to 80/20².
That’s where you find true super customers. And if you can optimize your customer acquisition so that you chase not just more customers, but more super-customers, well, then your profits can get super-sized, too.
Don’t just think of this in terms of money. Super-customers can deliver returns in many different ways. They should be the focus of your customer management strategy.
Here are a few possibilities:
This is one of the most compelling marketing statistics I’ve come across this year:
It’s a great example of why it’s so risky to get too focused on any one metric. Of course, it’s good to have a number you want to improve. But if you look at your customers in only one dimension, you may miss what’s going on (as well as a lot of profits).
Case in point: If a business only focused on how much money a given customer had earned them in a particular quarter, they might see a low-value customer.
But widen the time frame, and they could realize they’re looking at a customer that’s been with them for 20 years. And if they tallied up the income they’ve earned from that customer over the last two decades, they’d also see an extremely high-value customer. A super-customer.
But slice the data the wrong way, and you’ve got a customer that might appear to be just so-so.
2. Customer Overhead.
While loyalty and customer retention are popular metrics to optimize for right now, I propose there’s another way to see how valuable a customer is.
If you ever went to business school or even took a few business classes, you may have come across a profit-and-loss analysis. It’s usually a one-page spreadsheet that tallies up all the income and all the overhead costs a business has. At the bottom, it shows how much profit or loss is left.
If you’ve ever calculated one of these sheets, you probably noticed that trimming overhead is one of the best ways to make a company profitable. That’s why when companies go through rough periods they trim back their overhead costs, whether that is retail space, office space, people, or operating budgets.
Duh, right? This is about as Business 101 as it gets.
So if this sort of overhead calculation is so fundamental to our businesses, why aren’t we looking at customers through the same lens? Why don’t we calculate customer overhead on a customer-by-customer basis? Shouldn’t this be included in our customer management strategy?
There is one way businesses already gauge customer overhead. It’s in the customer service department. Anyone who’s ever done any customer service work (or any sales work) knows that some customers are just plain “high maintenance.”
This doesn’t mean they aren’t worth the extra effort (sometimes). But it does mean they call your reps more often, ask more questions, and take up much more time than the average customer.
This raises another way to measure your customers: by how much time and how many resources they require to stay happy. It also invokes the 80/20 rule.
Let’s circle back to the idea of customer overhead. Some marketing experts recommend firing your “problem child” customers – aka your high overhead customers.
Sure, you’ll lose a bit of revenue if you do this. But you may also save some sanity. And a heck of a lot of time.
Salespeople or account representatives are especially familiar with this. If you’ve only got so many hours to manage for yourself, and you’ve only got so much energy, be like smart sales reps who only go after clients who aren’t a drain on their limited resources.
“Limited resources” can include a lot of things. There’s the time limitation, of course. Then there are the resources some extra-demanding clients may require from your company. Maybe you have to get help from other departments to support some of your customers. Or maybe you have to ask your manager to keep making exceptions to company policies for a particular client.
Then there are emotional resources. Some clients are … ahem … less pleasant to work with than others. Less patient.
And if they’re really bad, less professional.
That all takes a toll. It’s a kind of overhead cost.
A friend of mine is a high-level financial advisor. He has some clients who love him – he always feels energized working for them. Other clients … not so much.
Once, back in my advertising days, my agency lost an account. I had been working on this account, suffering through dealing with an inconsistent, impatient, and often verbally abusive client. So it was a relief when one day our team leader announced in a meeting: “Company X isn’t going to be sending us their jobs anymore.”
The room was quiet for a moment. Then somebody said, “Are we sad about that?”
So, let’s face it: Some customers/clients just aren’t good to work for. Their “overhead” – whether that’s in servicing time, resources required, or how much emotional strain they elicit – are simply not worth their revenue. And typically (here’s the 80/20 rule again), these “super-awful” clients tend to be worse than other clients, not by a little, but by a factor of 4x or 16x.
Unfortunately, as businesses, we typically handle these problem clients after they’ve become clients. We screen them out (if ever) only after they’ve already started to damage morale and profitability.
What if we started screening them earlier? Like in the marketing department?
3. Negative Personas.
You know what a persona is, right? I’m talking about marketing personas, aka customer profiles. Marketers use personas to help them customize the messages they send out to keep customers and to offer special services or tools and to create content to retain certain customer types.
It’s a best practice now in marketing to create content that’s specifically designed to engage with each different type of persona. And so any content marketer who’s been at their job awhile has probably developed a few customer personas.
Maybe you have, too.
But have you ever defined a negative persona? A type of customer you do not want to attract?
I recommend you do.
To create this negative persona, you’ll need extensive help from both the sales department and customer service. You might want to pull finance in, too. Because I guarantee that if you look at your customers’ overhead costs (including the toll they take on your sales’ and customer service staff’s morale) they will be able to tell you which types of customers they really don’t want.
In fact, sales may already have a working profile of this type of person. They may already be deliberately not following up on certain types of leads. Or they may be trying to avoid dealing with some clients.
You may also need some input from your executive team. It is possible that your #1 negative persona profile is actually a customer type for which your senior staff is developing a strategy. Your company executives may think this customer profile is profitable – but only because they haven’t considered the “invisible” overhead costs of these customers.
That is not an easy conversation to have (no kidding, right?). But if you’re in an open, high-functioning organization, it might be one of the most profitable conversations you can have.
No matter what department we’re in, or what level employee we are, we all want more results. Many of us don’t just want those results – we need them if we want to keep our jobs.
But there comes a time when you’ve maxed out your hours. When you’ve maxed out your energy, your enthusiasm, and your budget. Then there is no “more” of anything to put into your system.
At that point, if you want to get more results, the system itself has to get more efficient.
Finding your super customers and firing your “super awful” customers is one way to make your system more efficient. A good customer management strategy can get you there.
Back to you
Does your company treat all its customers alike? Or do you have customer tiers, with a minimum level of customer care (lest you become United)?
We welcome you to share your thoughts in the comments.