One of the common strategies for increasing your sales revenue is targeting your most profitable customers. Customers are not all equal. Figuring out how profitable your customers are, can help you grow every facet of your company. These won’t necessarily be the ones who spend the most —some of your customers who spend the most money won’t be profitable, as they may have negotiated heavy discounts or might require more customer support. The key is to identify those customers early and adapt your sales strategy accordingly.
You can use different measurements to identify your most profitable customers. For example, you can analyze your previous sales to find out who they are, take note of what they buy and when they buy it. You can then segment your customers and the products or services they buy into one of four categories:
- High sales and high profit
- High sales and low profit
- Low sales and high profit
- Low sales and low profit
It’s a good idea to focus on customers that provide high sales and high profit. However, customers that provide high profit on low sales can also help boost profits. If customers are providing low profit from high sales, you should think about adjusting your pricing to see if you can generate more revenue from these sales.
What makes your customers valuable?
Analyzing your customers allows you to identify those who best fit your business priorities. This will depend on your strategy; for example, if you are launching a new product, your aim might be to build sales as quickly as possible, whereas if you have cash flow problems you might value customers who pay quickly.
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However, most businesses want customers who are as profitable as possible. Customers tend to be more profitable if they:
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- Buy high-margin products.
- Pay full price without negotiating discounts.
- Place a small number of large orders rather than many small orders.
- Do not cancel or amend orders.
- Pay on time, without being chased for payment.
- Do not require extensive after-sales service.
By analyzing your records, you can assess how profitable each customer is. In some businesses, just a few customers are responsible for almost all the profits. Some of your largest customers might be among your least profitable. You may even find that there are some customers you would be better off without.
You should also try to look ahead. E.g, a business customer that is expanding might become more profitable for you in the future. It’s important to anticipate changes and how they might affect different customers. It may not be worth focusing any effort on customers who generate low sales and low profits.
Methods for selling more to your best customers
You can try the following ways to sell more to your best customers:
- Up-selling — selling them premium products with higher profit margins.
- Cross-selling — offering complementary products to those already sold.
- Diversifying — identifying a need and developing new products/services to meet them.
If you already have some clients, it can be beneficial to find the most common characteristics across the most profitable of these. You can start to create a picture of who your ideal customer is.
Important ways to identify these profitable customers
The following is a list of some of the most important ways to identify your most profitable customers—those that drive value and don’t detract at the same time.
- Continuously analyze your client data
You should get to know your ten best customers as soon as possible. Perform an analysis of your customer base, and find out who is providing you with the most profits. Once this discovery is made, it is important you don’t become complacent. By continually focusing on the same ten customers, you may miss the point where they lose profitability and a new yen emerges. Therefore, it is important to continuously reassess your customer base. That way, you can have an up-to-date ‘A list’ of clients!
- Don’t spend time chasing the wrong potentials
It makes sense for small companies to chase after the big accounts, in order to get big contracts with long duration. However, a company should analyze its numbers and find out where its real revenue is coming from. If the most profitable sector is indeed these large clients, then they should continue to be the target. However, in many cases, a larger number of smaller clients drives business and produces continuous revenue. Once identified, you can align your strategy to focus on these smaller clients, to maximize revenue. Of course, it can still be important to go after the big fish.
- Become familiar with customer life-cycles
Analyze your most valuable and profitable customers, to identify key profile and behaviour characteristics that are predictors for lifetime value. This way, you can identify at an early stage which clients are most important for you and you can align your strategy towards keeping these customers’ content. You can also start to target potentials which fit this identity so that they may also become valued clients.
- Apply the 80/20 rule – a Pareto Analysis
According to “Living Life the 80/20 Way” by Richard Koch, the following are true:
- 80% of your profits come from 20% of your customers.
- 80% of your profits come from 20% of the time you spend.
- 80% of your sales come from 20% of your products.
- 80% of your sales is made by 20% of your sales staff.
- 80% of your complaints come from 20% of your customers.
This is the Pareto principle and is applied in a rule-of-thumb fashion. Many businesses can increase profitability dramatically by focusing on their most effective areas, and eliminating, or ignoring the less effective areas as appropriate. Profitability is a function of how much was expended to achieve profit, not just the revenue itself.