Where is the good business sense in firing 10% of your customers? Are all revenue dollars equal? A refrain I hear frequently from salespeople is “why wouldn’t I sell to whomever I think will buy what I’m selling?” Do you have customer tunnel vision? You only see your customer with a $ sign on their name?
A good business answer to these questions and a true understanding of your customer requires an in-depth analysis of your customer base. How much time is spent in straight selling vs understanding who is buying from you and why? How well to do you really know your customer base from top to bottom. Like a lot of things in life either the best or the worst of something gets the majority of our attention. Neither provides good data for making operational decisions.
So, how would you go about figuring who’s on the firing list? How about by revenue that’s an old standby? What about who’s the biggest pain in the —– you fill in the blank. Do you know why your customers buys from you? When you look at how you compete in the marketplace who is the customer you are after, what are their characteristics? Does everyone in the company know what makes a good customer vs a bad one? What is an unprofitable customer? Have you ever looked at what the maintenance costs are for customers? The total cost of maintenance of a customer usually isn’t captured in your COGS. The answer to these questions is the start for a true picture of your customer base and building a Preferred Customer Profile.
An in-depth analysis of your customer base should lead you to question some long-standing business practices that have just become a way of life in your company. In my experience companies spend way more time selling to their customers and potential customers than understanding them beyond a revenue standpoint. How frequently do you have an in-depth face to face conversation with them to understand your company through their eyes? Here’s a thought, take 10 of your top revenue customers, 10 of your bottom 10% in revenue, and 10 of the highest maintenance ones and have a face-to-face conversation with them about why they do business with you. Brave companies even go out and try and talk with prospective customers they would like as customers to try and understand why they don’t buy from them.
I recently had a conversation with an individual that told me this story. After he completed an extensive analysis of the inventory on hand in the warehouse, he had a discussion with the owner. His spreadsheet presentation drove home the cost of keeping this level of inventory on hand. Note: this was early in the time of moving to just in-time inventory. Another part of the analysis looked at inventory by customer revenue size. The bottom line was emphasizing how much cost they could take out by reducing inventory and moving to just in time. The owner of the company responded by saying “we have a lot of companies large and small that have been buying from us for years and their primary reason is we can fill their order and ship it today. If we can’t, they will go to someone else that can and probably find they can get it cheaper even if they have to wait. Do you think they are going to come back to us?” He knew his customer base and what they valued and how he had positioned his company in the marketplace, and it was not on being a low-cost provider. Be careful of the 80/20 rule when it comes to your customer base, i.e., 20% of your customers bring in 80% of the revenue. The rule doesn’t tell you much more than that.
Do I think you should fire 10% of your customers, no not really? What I know is the analysis will lead you to uncover critical insights about how and why you make decisions. The value is in the analysis not in firing customers, although afterwards you might indeed fire some.
When I have watched companies go through this process here are some observations of what they said they learned. They uncovered some market niches to exploit and in one case a new market to move into. Small revenue customers weren’t necessarily bad when you looked at cost of the sale and maintenance costs combined. The opposite wasn’t true of a larger revenue customer and, in a few cases, fired them. In another case they found that a couple of large revenue customers led them outside of their market niche and they didn’t want that.
Even though they agreed at the front end in general with the statement ‘all revenue dollars are not equal’ they were unable to provide credible data to support the agreement. After an in-depth analysis they could articulate a concise reason how and why it was true in their business. They also utilized the information in how and why they made decisions regarding selling, customer service, inventory management, sales strategy, product development, etc.