Fire Some Customers for more Profitable Revenues

Business media is rife with the importance of acquiring more (and more) customers. And marketing largely develops general messages that broadly appeal to many prospects. The dot com boom popularized the notion of getting eyeballs without accompanying revenues. You combine those and end up with a large number of irrelevant users and unprofitable customers. You need neither of those unless you are an academic, hobbyist or a charity. Instead, choose your customers. Let’s talk about prospecting, weeding your current customer list and nurturing the ones you want to keep.

Prospecting: If you are seeking new customers, you need to have an ‘ideal customer profile’ that includes customers who are strategic, long-term and profitable? Studies have shown that 10% extra effort when targeting will result in 30% more relevant prospects.

Almost everybody has heard about the 80/20 rule but few companies take the time to segment their customers analyze the data and then target markets. Some customers are inherently likely to provide better margins. For example, high growth companies are giddy about their revenue growth and will provide good margins to vendors who will support that growth. On the other hand, a company with flat or declining revenues will be reluctant to accept price increases and instead seek to work prices down. Who are your prospects?

Weeding: Midsize companies often depend on a handful of companies for most of their revenues. But, are they profitable customers? Some of these customers may be old customers, often with good deals for them and low profit margins for you. Those customers are generally unwilling to accept new terms or price increases. What can you do to improve your profit margins with these customers?

You get them to buy greater volume from you, or bundle other products or services that will increase your margins. Or, you can weed unprofitable customers with low spend by discontinuing unprofitable product lines. If they choose to leave, send them a Herb Kelleher (Southwest Airlines) note – “We will miss you”. Unless they can provide profitable revenues or increase their spending (with profit), you are better off without them.

Nurturing: Customers who have a good amount of spend with you and are profitable customers are worth nurturing. What customers crave for (and benefits you) is more engagement that enables them to get products that meet their needs (and enables better product development for you). A group of companies that practice customer intimacy over marketing are the German mittelstand (SME) companies. Check out our section on the German Mittelstand in the special section of our website (http://www.midmarket.org/special-section/german-mittelstand). They are also likely to become ‘sticky’ customers if you are engaged with them and they get products that meet most of their needs.

Unless a customer is strategic (helps you with product development or market access) or generate profitable revenues, why bother.

Every company has a mix of customers – strategic, profitable, unprofitable, long term, short term, lead users and late followers. What mix of customers is good for your company right now depends on your situation, strategy and judgment. May you have many high revenue and highly profitable customers!


 Posted by Ram V Iyer
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