A while ago it seemed like all customers were profitable. Sure we had a bad apple or two but most of the time we sold a product, customers bought it and, as a result, we made money. In today’s environment, it is very different. I would venture to say many of your customers are not profitable. When you start looking at true costs you probably will find that you are actually losing money to double or triple the percentage that you would first think.
The pricing pressures we have faced in the last year or two has even added to the number of non-profitable customers. The rapid commodity of your product and increased Internet purchases are two more examples that has accelerated the decline of profit margins. I can use the analogy of a stream full of rocks (customers) and as the water is lowered more rocks start appearing. These unprofitable customers are appearing daily. However, in these economic times even a bad customer is valued because they seemed to help support your fixed cost. This puts additional pressure on your profitable customers and at a risk that you can hardly afford to continue. If you do, you may start losing the profitable ones.
Most advisors will tell you replace or remove these unprofitable customers. It is sound and prudent strategy, but who is going to give up a customer in these economic times? I certainly would not.
My strategy is to first; rate your customers by profitability. That can be a rather eye-opening experience. It may not only tell you who to value but also what they value about your organization. This of course is the marketing segment that you want to spend your efforts and more than likely your money on developing and maintaining.
Secondly, I encourage you to build your marketing value stream segmenting customers by profitability levels. You may end up with several swim lanes but try to put the marketing flow, your value stream in for each segment.
Thirdly, segmenting these customers will allow you to better see what they don’t value. You may see something they are not utilizing such as training, engineering support, etc. Not all people or organizations value the same thing. To build the unprofitable customer segment into a profitable stream may only take the removal of certain items, streamlining your offering. Other features may have developed into your product that became normal and just easier to include all the time. Strip these out and offer a lower cost model. I am not necessarily thinking about just the end product or service but also the overhead associated in operations, sales, and marketing.
Compressing this value stream may even create additional opportunities. Customers left to their own imagination on how to utilize a simple product that they understand create some of the best product innovation. You will even get better at distinguishing your customer’s preferences and anticipating their needs. Customers are moving to what I would call marketing singularity. Having marketing segments as small as one person may not be that far in the future. The key will be taking these simpler segments and still maintain profitability rather than just passing them on to your competitor.