20% of customers yield, on average, 80% of profits
The Pareto Principle often applies in that the majority of profit is generated by the minority of customers. It is vitally important that you understand who these customers are, and work tirelessly to ensure that they have high levels of satisfaction. Do you measure customer experience levels? Do you know what makes your customers happy, and what you might be doing wrong that could cause them to seek alternative suppliers? Maintaining a high level of customer satisfaction is vital to ensuring that customers remain loyal to you in difficult times, and that you are well placed to attract additional customers as your competitors fail or the economic upturn arrives.
- Which of your customers generate the highest return?
- What value is placed on customer satisfaction
- Do you measure your customers’ experience and seek to improve it?
- Do you understand and measure your cost of sale?
- Are you set up to take advantage of dissatisfied customers switching to you from your competitors?
Devoting time to unprofitable customers
If 80% of profits come from 20% of customers, then it also makes sense that the other 80% of your customers are generating — proportionately — a smaller profit, or worse, are losing you money. Are these customers overly demanding in terms of specification or quality? Are you recovering your direct costs (cost of sale) and making a contribution towards your overheads? Do these customers pay on time or do they take additional credit, leaving you exposed to cashflow issues? Is there a high cost of cash collection caused by ongoing or persistent dispute resolution on deliveries or invoices? Do these customers represent small, narrow niche markets which are resource intensive?
Serious consideration should be given as to whether you want to retain these customers in the short term if they are draining resources. Where possible, seek to renegotiate pricing structures or order, delivery and payment terms with these customers. It can even sometimes be better to walk away from these customers and focus your efforts more on the 20% of profitable customers, whilst trying to attract new customers from competitors.
“Loss leaders” should be exercised with care—customers who consistently “shop around” are usually looking for a least cost solution and not long term loyalty; they could take advantage of your generous offer and then look elsewhere for the next ‘deal’. Loss leaders can—though not always—be very hard to convert to long term profit in a recession. |
