You’ve done the due diligence to understand your cost to serve and you now know the cost drivers that are leading to negative customer profit margins. If you read my earlier piece, ‘Knowing when to fire a customer,’ you’ve hopefully not yet had to actually fire any customers because you’re taking the necessary actions to move your customers off of your loss-maker roster. But this cost to serve analysis is going to yield more benefits if you analyze the profitability drivers further and focus your business accordingly. Here are some ways to inject your cost to serve insights into your company strategy and operations.
- Determine the segment(s) of customers who are most profitable
While typically all customers contribute to overhead in some way, there are usually a handful of customers who stand out as more profitable than the rest. But, why? To begin to answer this question, group your customers according to the ways they are somewhat homogenous. Think about the groups or segments of customers that you serve: by size, industry or location, by the types or frequency of products or services they consume from your company, or by the type of channel through which you acquired them. Analyze the net profit margins of your customers at these segment levels. Do you have some groups of customers who collectively have higher profit margins than others or vice versa?
Now think about the reasons why these customers are collectively more profitable. Is it because of the type of industry they are in? Is it because they have certain skill sets or staffing that allowed them to be more self-sufficient? Or is it because they purchased during a specific time of year or season that allowed them to focus more on your product and services. Or maybe you acquired them through a specific channel such as an event, sales team or partner. Whatever trend you recognize ensure it is just that – a trend and not a nuance specific to only one or two customers within a group. Tag your customers with these segments and evaluate their profitability over time.
- Target the profitable customer segments
If you read my earlier article on this topic, you may have chuckled when you read my statement about being able to hunt customers. As your company grows it’s important to be selective about the types of customers you take on and anticipate just how profitable they will be. Using the customer segmentation exercise you completed in step 1, you now have a good sense of the characteristics that make a particular customer group profitable. Use these insights to hunt your next customers.
Ensure your sales and marketing team understands these characteristics and uses them to generate leads. Equip them with powerful use cases or case studies of how your products and services are relevant to those customer segments so its easy for them to recognize the value of what your company has to offer. Think about the places where those segments shop for what you’re offering, either physical or online, and be present in those spaces.
- Align and optimize your acquisition channels
Again going back to the customer segmentation analysis you completed in step 1, you may have identified certain channels by which your more profitable customer groups entered into your sales pipeline. This could be either via a certain sales team, an inbound marketing channel such as a website, or even from a partner. Were these customers more profitable because you spent less to acquire them? Meaning you spent less on the marketing tactics or the sales visits? You may have just identified your most efficient channels.
Ensure these channels are supported with the resources they need to be successful. Does your website need to be revamped? Do you those sales teams need to be retrained? Have you already secured a booth at that event? If these are the channels by which your most profitable customers are being acquired, then make sure you are present and ready to best represent your company.
- Package your service delivery options according to your customer’s needs
Here’s where you get to reimagine your service delivery model. Okay imagine may be too lofty of a word. How about refine? You may have observed that your most profitable customer segments collectively have (or do not have) certain needs that could be contributing to their profitability. Maybe they are not using some of the services you are making available. For example, perhaps they have a certain in-house skill set already and don’t need one-to-one phone support. Instead of adding more staff to your call center, perhaps you should invest in self-service support options on your website.
Or maybe there are ways that you can add to the services you deliver so you can see increased revenue across the entire group. For example, if certain customer groups are purchasing the same services or products from you a handful of times each year, perhaps you can offer an annual subscription for those services or products with an automated subscription billing cycle.
- Make sure they remain customers!
I can’t stress this enough – your most profitable customers are invaluable assets. While it’s important to ensure they are renewing their contracts with you one-on-one, you also need to think about the ways you can deliver more value. This is what many of us marketing folks refer to us ‘stickiness.’ Again, because you’re evaluating your customers according to homogenous groups, the new ways in which you can deliver value are going to be more efficient because you’re able to offer them to an entire group.
Have a think about how these customers can add value beyond profitability. Are they members of your customer advisory group? Are you getting them together once a year to network with each other and discuss the collective challenges their facing? You can feed these insights right back into your business strategies and build a continuous cycle to ensure your company is focused on the things that matter most to your most profitable customer segments.