You want more customers like your most profitable customers. These won’t just be the customers who spend the most money. Some of the customers who spend the most won’t be profitable (they’ll be the ones getting the highest discounts and requiring the most time for support).
Your most profitable customers will be people who act like a free sales force for you by referring profitable new customers and acting as brand advocates spreading credible, positive word-of-mouth. They’ll buy across product lines and be willing to pay full price.
Learn how to identify who your most profitable customers, clients or donors are so that you can treat them like VIPs and focus your marketing activities to attract more people like them.
From our experience
Many businesses, both large and small, use a marketing strategy that attracts the most new customers vs. the best new customers. Unfortunately some of those new customers will be “switchers” (people who switch to whoever is offering a special deal or the best price.) New customer acquisition is expensive and you don’t want someone who is unprofitable or unpleasant to serve and won’t stay on long-term. Any referrals switchers give will likely be people just looking for the lowest price.
We believe one of the most important things a business can do is to identify their most profitable customers and to develop marketing programs that will attract similar people.
Know this: For most businesses, 80% of profits come from 20% of the customers. These people should be treated like VIPs. Everyone who interacts with customers should know who they are.
Research shows that more than 50% of small businesses DON’T KNOW who their best customers are. How can you retain these high value customers/clients and build loyalty among them when you don’t know who they are in the first place?
Who are your most profitable customers?
The best customers and clients…
1. Proactively refer others
Optimally they refer others who are willing to pay full-price, are pleasant to interact with, buy across the full product/service line, and keep the cycle continuing by referring other people.
They may use word-of-mouth, social networks, and/or post positive reviews on websites like Yelp.
2. When asked, recommend your products or services
Some people won’t initiate sharing positive word-of-mouth but they will make a credible, positive recommendation when asked.
3. Pay full-price
They aren’t always “strong arming” you for a deal.
4. Are loyal
You have 100% of “customer share” for the category of products/services they buy.
Their loyalty is freely given – not forced. “Forced loyalty” is when an individual or company looks loyal based on their buying behavior but they’re really not totally satisfied and would like to switch but they don’t have the authority to make a change or it is too much effort to do so. Perhaps it is too much hassle to change banks, phone companies, or software or maybe they are receiving a benefit they enjoy such as airline miles. Or, someone else makes the ultimate decision on what brand to buy, and they go along. This is the case with kids (the parents choose the brand of milk) or with companies where the company had decided to buy Dell computers instead of Apple Macs.
5. Buy all relevant products/services that you sell
In other words, you don’t need to “cross-sell” them. They already purchase all relevant/appropriate products/services that you sell.
If they’ve bought a product from you, they also buy maintenance services.
6. Pay on time
Are your protecting your business from customers who go bankrupt? During difficult economic times, small businesses may face either late payment or non-payment issues with their customers. Some of these customers may eventually go bankrupt. Small business owners should have contracts that clearly spell out the terms of payment.
Customers should know what happens if they are late on payments. Contracts that specify financial terms are very beneficial if you have to take the customer to small claims court over non-payment. In the event of bankruptcy, contracts that state financial terms will help you move up the priority list of creditors.
7. They are reasonable
They don’t return things unless there really is a legitimate problem.
If they have a customer service issue, they let you know in a professional and constructive manner.
8. Aren’t expensive to serve
They don’t require an abnormal amount of time in the pre-sales process nor for after-sale support.
Bonus: they are pleasant to serve
You, or your staff, like them and look forward to seeing and helping them.
People like this are the people you want to clone! You want more customers like them. They are the ones who should be wearing your “logo wear” (t-shirts and hats with your logo on them). These are the people who should be treated like VIPs. These are the people you want to make sure are completely satisfied. And who you want to develop new products/services for.
Do you know who your most profitable customers are?
Can you name them right now? Can your staff? Make a list of who these people are. What do they have in common? Why are they the most profitable?
If you were buying a direct mail list with all these selection options (demographics, hobbies, interests, life stage, age of kids, income, gender, educational level, geographic area, and for companies selling to other businesses, you’ll want to also list information about their job title, role, company size, etc.), could you identify criteria to select people like them?
Can you and/or your staff list your least favorite customers? That list is helpful to identify what, if anything, these people have in common and how they became customers. You don’t want to attract more people like them!
If you’re a larger business that sells to more customers than you can know personally, then you’ll want to do analysis work on who buys the most, pays on time, purchases multiple product lines/services, and has been a loyal long-term customer. Ideally you should also be collecting and tracking which customers refer other people to you. Those customer advocates are like your free sales force!
If you sell through retailers or a third-party channel and you don’t know who your actual customers are, you’ll still want to figure this out. Understanding this will help you develop products/services for these customers as well as with your marketing.
Is there any marquee value to the customer? By that we mean can you use their company brand name to help you get other clients or customers? And if there is value in their implicit endorsement of your company/products/services by buying from you, do they allow you to use their name in your marketing?
You’ll need to do this analysis for each customer
Start with who you think are your biggest and best customers.
Their total spending (or your revenues from them) for a year
If you want to be more granular, then also look at weekly and monthly spending
Doing this analysis will also help you identify trigger events when they will be likely to repurchase or upgrade
Your costs of goods or services you’ve sold to them
This should include their discounts.
You’ll quickly see that your biggest spenders erode your profitability because of the deep discounts they require or negotiate.
Cost of support and sales
- Are they a high maintenance customer? By that we mean do they require a lot of pre-sales or post-sales support?
- Do they make a lot of returns?
- Do they require you to create specific administrative or sales processes just for them?
Do the math! Subtract the cost of servicing the customer from the gross revenue received. The result is your profit margin for that customer.
From our experience: This analysis will cause a lot of “aha” moments. Who you have come to think of as your best customers will change. The average customers who buy without a discount and don’t require nor demand extra support, sales or services will suddenly become much more valuable to you. They are the ones who most likely will be most profitable to sell to.
Define who you don’t want to attract as customers
Who don’t you want to attract? People who…
- Don’t pay their bills or don’t pay on time
- Are “high maintenance” (make a lot of customer service requests and/or returns or consume a lot of pre-sales time before they buy)
- Return frequently
- Make unreasonable complaints
- Post negative comments on sites like Yelp
- Annoy the staff and put everyone in a bad mood
- Switch brands/products based on what’s on sale (not loyal)
If you’re losing money, why are they still a customer?
At the very least, these unprofitable customers should not be receiving any marketing from you. You don’t want any more of their business!
You want your marketing and sales team focused on:
- How to identify potential new customers who are like your most profitable customers
- How to increase spending and referrals from your most profitable customers
- How to move “profitable enough” customers to be more profitable
TIP: All this information about who your most profitable customers are should be saved in your customer database. These people should be flagged as “MPC” (most profitable customers) and they should receive invitations to events, news about what’s happening in the company, and personal attention. You may want to learn more about CRM which stands for customer relationship marketing.