In a typical business, 20 percent of the customers are unprofitable. Worse yet, says marketing veteran Gloria Berthold, founder and president of Outsource Marketing Associatesin Elk Ridge, Maryland, they cause 80 percent of your headaches.
If Berthold is right, you'd be wise to dump one of every five customers. (If you have a retail business, however, think twice before acting on that advice.) Berthold further posits that another 20 percent of customers account for 80 percent of profits.
It goes without saying, then, that you need to determine who your profitable customers are. You can probably guess their characteristics: He or she will value your product or service, accept your pricing structure, provide you with repeat business, discuss options before making a final decision, trust you to perform as promised, refer you to others, and pay bills on time.
In contrast, unprofitable customers always take issue with your prices, demand services you don't normally provide, are never happy with the services you do provide, and demand additional services but refuse to pay for them. They purchase less frequently, are not steady customers, and invariably are slow- or no-pays. They're always difficult, they're costly in terms of time and effort, and they often spread negative stories about your company. "They are not necessarily bad customers--just a bad match for your particular company," says Berthold. "They may work well with one of your competitors."
Furthermore, warns Berthold, high-volume clients are not always desirable. They can be unprofitable if they're too demanding; insist on special care, services and prices; and call for an inordinate amount of your staff's time and attention.
So, to determine your best clients, Berthold suggests you assemble a list of your high-volume customers and, from that, identify the top 20 percent of profitable customers. Then create a profile of your ideal customer based on location, industry, revenues, number of employees, sales strategies, buying approaches and even the role of the person you deal with (HR director, president, purchasing manager, buyer). "You want to capture each company's personality and method of doing business," she says.
Once you've compiled a profile of your most profitable customers, you can target comparable prospects when seeking new clients. "Your best prospects will look like your best clients," notes Berthold. Similarly, a profile of unprofitable customers can save you from wasting marketing dollars on the wrong prospects.
Paul DeCeglie, a freelance business writer based in Los Angeles, is a former staff reporter for American Banker and Journal of Commerce.