It’s as easy as ABC…
Ever heard of the Pareto principle?
You probably have – it basically says that for any set of events, 80% of the effects come from 20% of the causes.
And the biggest area in business where this tends to hold true?
With your customers.
Do an analysis and if you’re like most business owners you’ll find that roughly 80% of your profit comes from 20% of your customers.
And in all likelihood, that 20% are probably the customers you like dealing with best – they buy frequently, pay on time, love what you do and give you great referrals.
And the other 80%? Well, they won’t all be dead weights but you can guarantee there’ll be a fair number who are. You know the ones – they moan about your prices, pay late, are the first to complain if something goes wrong and wouldn’t refer to you in a million years.
However, until you do that review, you won’t know which are your great customers and who you should drop like a hot potato.
Now we suggest our clients go one further when analysing their customer database.
We encourage them to create what we call the ‘Optimum Customer Matrix’.
Well, you need to look specifically at two characteristics of each of your customers – their profitability and how much business they refer to you.
(And by the way, don’t just think about direct costs when you think about profitability – if you have to chase a customer for payment or need to be at their beck and call then this all eats away at their profitability.)
You then allocate them to A, B, C or D as shown in the following diagram:
So what does each letter stands for?
A These are the customers who are highly profitable, love you, pay on time and refer frequently.
B These customers are profitable, they may be fans of what you do and they don’t cause you many problems but they don’t refer very often.
C These customers aren’t particularly profitable but they refer quite frequently. As long as the customers they refer are profitable you may be able to live with this
D These are the customers who create as much havoc and stress as they can, making everyone’s life a misery – we call them BMWs – Bitchers, Moaners and Whingers..
Once you’ve identified the customers in each category, your job should be to move your B’s to C’s to A’s.
So how are you going to do that?
Well, moving customers from B to A might be as simple as having a referral system (the Business Growth System covers what a referral system should look like and how to implement one in your business). You’d be amazed how many customers would happily refer but simply aren’t asked to!
And your C’s to A’s? Well that can be trickier. You need to look carefully at why they’re unprofitable and what you can do to change this. And you also need to look at the type of customers they’re referring. Type C customers often make type C or D referrals. And if that’s the case, you need to stop this cycle as soon as possible.
And what will you do with your D customers? Well, if you can’t make them profitable, in our experience the best thing for everyone is to ditch them as soon as possible – and hopefully they’ll go to your competitors!