Nurture Your Most Profitable Customers
One of our clients in the security business found itself facing significant headwinds to achieving profitable growth. The company's customer portfolio was eroding due to low customer satisfaction and many of the customers that were still around were unprofitable. The organization needed to focus on its large, recurring customers, and become more systematic about driving value for these customers.
To do this, the leadership team needed to better understand their customers, both from an internal and external perspective. To better position the company to capture market share instead of losing it, we completed a customer profitability analysis that informed three key strategic initiatives across the organization.
1. Protect the current customer base.
Our client saw significant customer turnover. There were a few external factors driving the attrition, but we focused on addressing the factors our client could control. First, they needed to improve customer "onboarding" and customer service to increase satisfaction rates. Secondly, as a provider of subscription-based services, the company needed to increase focus on the back-end of the customer lifecycle in order to drive contract renewal. Finally, our client began to proactively manage "at-risk" customers. A team was put in place to identify attractive customers with a high attrition risk. The sales team was empowered to actively incentivize and manage the retention efforts for those customers.
2. Expand the customer base.
Our client had a significant opportunity to capture market share in particular geographies. Historically, they hadn't been looking at the business from a granular view, so we worked with them to assess profitability by geography in order to segment the business. We created views of profitability by region, town, and the territories of individual sales reps. As a result, we noticed significant variability in margin and market share across individual territories, which indicated that we needed to create tailored strategies, dependent on each territory's unique situation, to capture additional customers.
For example, we compared two towns having similar populations, economics, and growth rates. From a market perspective, these towns were very similar; but from our client's perspective, their presence in these towns varied greatly. By looking at each town from a granular perspective, we realized that the low performing town did not have the appropriate headcount to support demand and that the resources we did have were not being trained effectively. By segmenting the business, we were able to identify our strongest territories, understand practices that were driving their outstanding performance, and determine ways to enable other territories to adopt their successful behavior. This approach can be used to segment customers by a variety of characteristics, such as geography, vertical, or customer size.
3. Gain a better understanding of "customer value" across the customer base.
The third strategic initiative involved creating a metric by which to assess customer value, because not all customers are created equal. We began to drill further into the drivers of variation in margin, such as the quality and accuracy of our initial monitoring cost estimates (a key driver of profitability for our client), field incentives, and pricing policies. Once we could assess who the "good" customers were, we could optimize resource investment across these key accounts. This led to improved margins through cost control and price realization.
Gaining a better understanding of the customer base, both new and existing, enabled our client to shift resource allocation and investment (e.g., people, capital, management time, etc.) toward higher-growth and higher-margin segments of the business.
What do you do to understand your customer base better? Please send us your thoughts and questions to email@example.com
Associate Lindsay Comstock contributed to this article.
KARL STARK AND BILL STEWART | Columnist | Co-founders, Avondale
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.