14. Micro Perspective: Focus on High-Value Customers

The heart of micro research is analysis of your existing customer base. Learning more about your current customers is a critically important step in your growth plan. The outcome of the next exercise has eight benefits:

• Segment customers based upon revenue and profit.

• Segment customers by characteristics to improve target market criteria.

• Create a profile of your best customers to use this to target new customers.

• Create different levels of service for different customer segments.

• Align everyone, especially those in sales, marketing, and customer service, on the definition and criteria of different customer segments.

• Reduce customer defection.

• Create strategies to build customer loyalty with your best customers.

• Develop marketing programs for distinct customer segments.

The Most Powerful (and Easiest) Way to Improve Profitability

This exercise is my favorite in the entire planning process because I have seen how this simple analysis adds significant value to every business that has used it. It helps focus companies on attracting higher value customers, it refines marketing strategies for customer segments, and it will help you find new customers who match your ideal target market profile. It is a very simple yet powerful segmentation process.

The first step is to segment your customers according to revenue and profitability in four quadrants: A, B, C, and D customers. Here is a definition for each category:

A Customers = High Profit, High Revenue

B Customers = High Profit, Low Revenue

C Customers = Low Profit, High Revenue

D Customers = Low Profit, Low Revenue (Therefore, the “D” stands for “Deadbeat.”)

“A” customers are your most profitable and highest revenue-generating clients that you want to love individually and often. “B” customers represent an opportunity because business transactions with this customer segment are profitable, but these customers do not purchase very much from your business for some reason. Is it because they are giving part of their business to a competitor? Is it because they make only occasional purchases? Do they tend to buy only in small amounts or in one product category versus across your product or service lines? Are the customers in this segment aware of the full range of products and services your business has to offer? A thorough analysis of buying behavior and decisions will help you take the necessary action to help transform these customers into “A” customers.

“C” customers are those who may purchase a lot from your business and therefore generate a lot of revenue, but transactions are not profitable for some reason. Perhaps these customers are demanding price concessions and discounts. Maybe they only buy “loss leaders” and purchase more profitable items from someone else. Or perhaps your “C” customers require more service from employees? As you analyze this group of customers, the goal is to understand why business transactions with this customer segment are not more profitable and figure out what you can do to change this.

Often businesses will discover large revenue-generating customers are in this segment and these customers receive a substantial discount. If your goal is to increase brand awareness by securing a powerful customer, then this may be an acceptable strategy. If you have customers in this segment that receive large discounts and also bring in a substantial amount of top-line revenue, this may also be acceptable. The most important question to ask as you evaluate customers in this category is to ask, “By servicing customers in this segment, what am I giving up by continuing to put resources toward these customers instead of ‘A’ customers?”

The customers that are low revenue and causing a drain on your profits are your “D” customers, otherwise known as “Deadbeats.” When companies look at the customers in this category, they almost always discover that these customers are very difficult to deal with. They may be unpleasant, demanding, or just rude. In other words, it’s painful to do business with them and they cause a drain on resources, or worse, negatively affect employee morale.

You need to do one of two things with this group of customers. First, you should look for ways to develop them into “C” or “B” customers. Review the list of questions and issues listed in each category to see if they apply to this group of customers. Create a plan of action to see if you can increase the value of these customers and move them to a higher segment. If this doesn’t work, you will need to make the tough decision to “fire” them—or you can refer them to a competitor.

Existing Customer Analysis and Segmentation

Step #1: Categorize Existing Customers by Revenue and Profit

Start with what you know. Separate your existing customers into one of the four categories defined by revenue and profitability according to the A, B, C, and D definitions.

Step #2: Add Other Segmentation Characteristics

After you have segmented customers by revenue and profitability, the next step is to look at the customers in each of these categories to describe the characteristics that make each of these customer segments unique. What do you notice about “A” customers? Are there common demographic criteria that describe these customers such as size of company, geographic area, certain industries, amount of revenue, number of employees, primary decision-maker level, or other characteristics? Do these customers make referrals and tend to buy across multiple product and service areas of your business? Are “A” customers the most enjoyable and fun to work with?

When my company went through this process of segmenting customers several years ago, we discovered unusual criteria that we eventually made part of our target market criteria. This criteria was (1) they were in a specific profitability range; (2) they were smart, and we enjoyed learning and collaborating with these companies; and (3) they were fun to work with! As you can see, the definitions you ultimately assign to each customer group are both quantitative and qualitative. The goal for this portion of the exercise is to think creatively and objectively to define the characteristics of your best customers—the criteria will be used to define your primary target market.

Now evaluate your “B” customers; what do you notice? Do they only buy one or two products instead of several products and services from your company? Do they give you only a portion of their business while they give your competitors more? Are these customers from a particular industry or geographic area? How would you describe the target market criteria for these customers?

Now look at your “C” customers for common characteristics that could describe this group of customers. Why are these customers high revenue, but low in profitability? Do these decision makers consist of purchasing agents from large companies who purchase in volume at lower prices? Does only one department do business with you instead of the entire company? How is the decision maker different from customers in the other categories? What other characteristics would you use to describe customers in this segment?

As you ask similar questions for your “D” customers, you may notice that there is one particular aspect of this group of customers that is different from the others. Hint: It’s usually tied to the “likability” factor. Is this group of customers difficult to work with? Do these customers require a lot more service or “whine” more than any other customers? Do your employees cringe when they hear a particular customer is on the phone? Look at the group of customers in the group you have identified as “D” customers and define as many common characteristics of this group as you can.

Step #3: Define Service by Customer Segment

When you have finished the first two steps of this exercise, step three is to describe how you provide different levels of service to customers in each of the segments. Some companies may note that they don’t treat customers in each of the segments differently. This is not smart. “A” customers should be loved individually and often and your “B” customers require different handling than your “C” customers. Each customer segment should be entitled to different levels of service.

For example, first-class and million-mile business members get higher levels of service compared to coach passengers who fly infrequently and are interested in a discount price. All customers get to the same destination safely and at the same time, but the customer experience is different.

If you discover that you do not provide differentiated levels of service in each of these segments, you have made an important discovery. When you develop customer service strategies later in book, you can create strategies for each of the customer segments.

Step #4: Customize Marketing Programs

The final step in this exercise is to determine how you market to each customer group. Just as different service levels are needed, marketing programs for each customer segment should also be unique. As you consider your existing marketing strategy and communication programs, think about the types of special offers, rewards, and incentives you offer, as well as the frequency of your communication with segments of customers and/or individuals. Note how existing marketing programs vary (or not) for each of the four customer segments. Later in the planning process, you will put this idea to work to develop different marketing strategies and programs for customer segments.

I mentioned earlier that this one exercise has proved to be a goldmine for some businesses. Here’s why: Once you know who your best customers are, and why, this information can be used to target new customers who meet the same criteria. You simply use the criteria that you defined for an “A” customer as your ideal target market profile. Your observations about the characteristics in this segment may also lead to additional targeting criteria. Also note that if you have not maximized the revenue and profit potential for “A” customers and there are still considerable products or services to sell to these customers, then this group of customers might actually be your “B” customers. In this case, you need to set the bar higher and define new target market characteristics for “A” customers. This exercise will also help you increase both revenues and profits with your existing customer base by evaluating how to migrate them up another level or two, transitioning “B” customers to become “A” customers, “C” customers to “B” customers, and so on.

Every company I have worked with has found this exercise to be extremely valuable because it shines a bright light on information they didn’t know about customers. It also helps establish more effective marketing and sales strategies, as well as processes.

A healthcare company did this exercise and was shocked to learn that the 80/20 rule was actually reversed. Most of their customers were in the “D” category. By simply understanding this and defining what an “A” customer looked like, they were able to completely refocus the sales force on a new set of target prospects, resulting in a huge uplift in new sales. They also “fired” their “D” customers by politely referring them to a competitor, and this enabled them to focus their energy and build a new sales funnel of profitable customers very quickly.

Following completion of Figure 14.1, summarize your findings and decisions in the marketing plan template in the customer segment and target market sections. You will continue to refine this information as you complete additional exercises in this section.

Figure 14.1 Prioritize customers by value