Is It Time to Cut a Few Customers Loose?

A careful examination of your company's profits by individual customer and client segments may reveal that you're working for nothing in some cases

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Few businesses truly understand the actual profits generated by individual sales. Most metrics for sales effectiveness are monitored by reviewing top-line revenue results. Yet the most critical determinant of ongoing business viability is understanding what revenue actually drops to the bottom line after all the costs have been taken into account.

You must understand what profit is generated by sales to each of your customers. Then consider what the benefits and vulnerabilities of the cumulative impact of these sales mean to your business. Knowing the breakdown of profitability by individual sales can have a significant impact on your ability to achieve business goals.

1. Understand the impact of the profit per sale.

Many expenses go into determining a company’s profitability. The same is true for determining the profitability of a sale. Each sale has multiple components impacting its final profit. You should consider your total cost of goods sold, including investments in promotion and delivery expenses. Factoring in the costs associated with the staff time required to generate a sale is a must, too. Unfortunately, few companies consider all these expenses when developing their marketing and sales strategies. Whether you are working on growing your business or you are struggling financially, the impact of the true profits generated by each individual sale takes on greater importance.

2. Know your profit per customer.

There are two ways of looking at your sales profitability data. The first is by the individual customers. Frankly, not all customers are worth the effort to generate the sale. Sometimes your growth goals for your business mean you are also growing beyond customers you have historically served. This transition period is a very vulnerable point for any business. It is also very stressful because you might be wrong and wind up losing a customer who could have provided more revenue value if you had not been afraid to maximize your relationship.

Carefully study the costs associated with serving each customer. Perhaps there are long-term clients you like personally, but if you have not taken the time to explore the costs of the sale, their value to your business may have changed dramatically over the years. Before abandoning these customers, try to identify options to trim your expenses without jeopardizing your quality. But it may be time to move on if they are not generating any real profits for you.

3. Review your customer segments revenue.

The second way of looking at your sales profitability data is by combining clients using some specific target marketing components. Using a target marketing approach to group your customers by similar characteristics provides you with a more detailed understanding of what is working and what is not and also makes it easier to identify trends in the data that you can use to assess the profitability of each of these major segments. 

There are many options for grouping your customers into segments. For business-to-business clients, you could group them by their industry sector, number of employees, location, etc. For business-to-consumer customers, you could group them by where they live, personal attitudes, age, income level, etc. 

The key to effective target marketing is to focus your sales activities and expenditures toward those customers who can best be served by your company, who will stay with you over the long term and who will generate solid profitability. If client segment A generates solid profits for you but all of your marketing efforts are being devoted to client segment B who are barely breakeven, the choice is obvious. You must retool your marketing and sales activity to attract more prospects from client segment A.

4. Monitor individual client profitability.

A complete review of the mix of your customers and sources of sales will reveal your potential vulnerabilities if market conditions change. It is not enough in today’s complex and competitive marketplace to only look at your total overall sales. If you have one customer that generates more than one-third of your sales, you are in an extremely vulnerable position if you lose that client to a merger or change of staff or if it goes out of business. Controlling and monitoring your client profitability and cost of sales allows you to take corrective action before your business’ survival is at risk. This takes on even greater importance if you are overly dependent on key customers for your profitability.

5. The impact of pricing on profitability.

A close companion to client profitability is understanding both the impact of various pricing strategies on the perceived value of your goods and services and how they intertwine in attracting customers who will buy from you. Engaging in discounted pricing strategies often attracts customers who are buying from you based on price, not your value. If you are in a service-oriented business, this can be a slippery slope. You may get clients who keep you busy, but who do not generate the profits you need to build a sustainable enterprise or build your net worth. It is a delicate balancing act, but it’s one you must realistically consider, given your business objectives.

6. The impact of strategy on profits.

You must also consider the financial consequences of your business direction and your vulnerability to setbacks. This assessment allows you to make better business decisions and set a more realistic strategic vision for your organization. “Finding a lane” or picking your niche through target marketing must also incorporate a true understanding of the costs of reaching the right customers, as well as their ability to add to your bottom line in a meaningful way.

Final Thoughts

Reviewing the trend information for each of your major client segments is a highly impactful approach to re-evaluating the effectiveness of your sales and marketing. It removes your emotions and relationships with your clients to allow you to be more detached in considering their impact on meeting your business objectives. If you are not attracting the kinds of clients generating the profitability to move your enterprise forward, it is time to reconsider your approach.  

About the Author

Jill Johnson is a speaker, author and the president and founder of Johnson Consulting Services. Reach her at www.jcs-usa.com.



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