Not All Customers Are Profitable Customers – Choose Wisely

Not All Customers Are Profitable Customers – Choose Wisely

Would you like to grow and to expand your business but can’t see where you’ll find the time to do it? You’re already working flat out? A couple of years after starting my own business, I felt the same.

The business was doing well. We’d started to get some ‘traction’ in the market. We were building a good reputation and I could see there was potentially more business out there that we could service.

But I was already working long days and weekends. I couldn’t see how I could find the time to take up the opportunities that I could see.

Then I found the answer in the most unusual place…

It was coming up to Christmas and I decided to make the trip back to the UK to see my family. I really wanted to see them. I hadn’t been ‘home’ since starting the company more than 2 years earlier.

It was a very special trip. I got to spend Christmas with my family AND…I found the answer to my ‘growth’ dilemma in an unexpected place… in an English pub!

My sister and I didn’t see each other very often, so we didn’t know much about each other’s careers. I’d worked in finance and her field was market research. In the pub that day, I told her that I’d like to expand the business but I had no idea where I was going to find the time.

The last thing I expected was that my sister would have the answer to my problem.  But she did. And here’s what she said…

1. Not all customers are profitable customers

My sister told me that some customers are more profitable than others.

She said “Some customers make you money but some cost you money!”

That was a whole new concept for me. When I got back to Sydney I decided to dig a bit deeper…

We reviewed all the customers that we’d invoiced in the last 12 months and asked a few key questions about each one:

  • Who is expanding?
  • Who gives us repeat business?
  • Who appreciates our quality and service?
  • Who pays us on time?

We defined these as our ‘Ideal Customer’, our profitable customer.

Then, we ‘fired’ all the customers who were ‘difficult’ to deal with. The ones that weren’t profitable customers. We ‘fired’ the customers who always wanted us to lower our fees and then we ‘fired’ the ones never seemed to want to pay their bills.

What a revealing process. We found that about 20% of our customers were loyal and appreciative and were in effect responsible for about 80% of our profits. We’d found our profitable customers.

2. Not all prospects are equal

Next, we looked at our prospecting list. These were the people we were talking to month after month, hoping to persuade them to buy from us. Hoping they would be profitable customers. This is where we had our next 80/20 ‘epiphany’!

We discovered we were spending 80% of our marketing time talking to people who were NOT ‘Ideal Customers’.Now we could see that, in the long run, they’d never be the profitable customers we were looking for. It was either because they were too small (no repeat business) or they didn’t want to pay our fees (quality wasn’t their focus) or they had a poor credit rating for not paying bills on time.

3. The benefits of firing customers

After the review and restructure of our sales process we didn’t have to work extra time to grow the business. We focused 80% of our time nurturing our current ‘Ideal, Profitable Customers’, and prospecting for new ‘Ideal, Profitable Customers’.

The business grew through repeat business and referrals from our existing ‘Ideal Profitable Customers’ (that added to the profit because there were no advertising or marketing costs involved) and all our new ‘Ideal Customers’ were profitable from day 1.

By getting to know our ‘Ideal Profitable Customer’, and firing all those who weren’t ideal, the business grew and so did the profits. When our competitors were averaging a 10% profit, or even less, we had an industry high of 24% making the business more valuable and eventually, more attractive to buyers.

Just who are you selling to? Make sure it’s your ‘Ideal, Profitable Customer’, one that makes you money, not costs you money! Learn more about how to increase your bottom line.

To your business success!