Grade your Customers

One of our Olympic lessons was about the need to focus on the important things in your business, not spending time, resources and effort on things that are not going to deliver your key objectives.

One thing to consider is to carefully choose who you want as your Customers.  This may seem a little counter-intuitive, but let me explain!

Pareto’s principle states that 80% of your business comes from 20% of your customers.  The other 80% of your customers are probably costing you money – it doesn’t matter what business you’re in.  These painful customers might be the ones that give you an untidy and incomplete box of receipts if you’re an accountant and expect you to be a book-keeper.  All business owners can normally reel off names of customers that consistently complain about how long it takes you to deliver and how much you charge, then take months to pay.  You’d probably already discounted your price anyway, because you knew they’d complain.

Many business owners say it’s hard to get good customers.

It’s not hard – it’s just that nobody ever taught you how to attract the right type. After all, how many hours do you spend a year learning about technical or product issues.  Now how many hours do you spend, learning about better selling and marketing?  If it’s not about 50/50, you’ll probably find your potential for success limited by your own resources or simply by ending up copying ideas that your competitors come up with.

Here’s how you can progress down the path to working with better customers.

Define Your Ideal Customer

The definition of your customers involves working out what makes a customer profitable and at what point they become a cost to your business.  Many businesses put up with customers that consistently pay late, change their minds or appointments, expect miracles in terms of timing insist and haggle over discounts and are just downright stressful to work with.  It may simply be that the business has grown and evolved over time and you have lost track of the costs involved relative to the returns from that customer (I had a logistics client some years ago whose biggest customer – making 40% of sales – was actually the sole reason why the total business was loss making!)

Remember – it should be seen as a privilege to do business with you; not a right.  Customers that are not profitable should either be moved into profit or at least discouraged from using your services or buying your products.  The first step to doing this is to define at what point a customer stops being profitable.

One approach is to classify your customers from A to D, with A’s and B’s being profitable and C’s & D’s being low profit or loss making.  Start by looking at your most profitable and ideal customers, what do they do; what characteristics do they have?  Then look at your worst customers and list their typical traits.  As a rule of thumb, you should end up with about 20% of your customer base being ‘A’ grade, about 30% being ‘B’, 30% being ‘C’ and 20% being ‘D’ grade.

Once your customers have been defined into 4 classes, you should express your appreciation to the A’s & B’s – tell them that they are your best customers and encourage their custom. It can make all the difference.

You should then speak with your C & D customers, explaining the situation and encouraging them to become A and B customers, by making it clear what you expect from them, in return for your products or services.  If there is no change from a C or D customer after a couple more contacts, you should seriously consider ceasing to do business with them; refer them to your competition!  They are costing you money!

This is a bold step to take, but take a careful look at your customer base and ask yourself if you are happy with all of them… and if you aren’t what can you do about it?