Business owners sound off about determining customer value.
Figuring out which customers are valuable in the beginning can save a lot of trouble and cost.
The Atlantic’s Megan McArdle recently discussed our article, “It’s Cheaper to Keep ‘Em”, which generated a number of interesting comments. One reader, “SPQR9,” wrote: With respect to the idea that there are customers that you just don’t want, that can definitely be true in the legal profession. Figuring out who those customers are in the beginning can save a lot of trouble and cost.
We would definitely agree with that statement. Often our clients find that prospective customers give a number of clues (e.g., the products and solutions they buy, their demographic characteristics) as to how valuable they will be over time. By unsentimentally reading those clues, a business can focus its energy on gaining valuable customers. The business can also look for opportunities (e.g., in pricing, product/service bundling or operating model) to make marginal customers more attractive before taking them on-board.
Another reader, “Chris365,” commented: There are some customers that are too costly to serve, and sometimes they can be even frequent or large customers. It’s not uncommon for a large customer to be the least profitable.
In our experience as well, the largest customers may be the least profitable; however they may still be very valuable. Often the large customer may serve as an “anchor” to the business by creating the scale or customer drawing power essential to business value. For instance, the shopping mall’s anchor tenants, often the large department stores, typically pay little or no rent, but drive shopper traffic levels that more than compensate the mall owner, who as a result can charge high rents for the smaller mall shops.
Reader “willallen2” wrote: I once made a [sales] pitch to a bald, tattooed guy, who was about 6 foot 4 inches, 230 pounds, holding a tire iron, and there wasn’t a tire in sight. Yeah, business had been slow.
Willallen2 is much braver than we are! In the movie Jerry Maguire, Dicky Fox declares, “Unless you love everybody, you can’t sell anybody.” Kudos to willallen2 for showing the love!
Here are other articles we have written recently on the value of customer relationships:
In 4 Steps to Super-size Your Growth we discuss the value of paring back your non-core customers and products as a stepping stone to growth, and ask the questions: If you were forced to eliminate the bottom 20 percent of your customers, what resources would that free up? Where else would you invest in the business to make up the lost revenue?
KARL STARK AND BILL STEWART are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree. @karlstark