Define the right customers

One of the most valuable questions to ask about your business is “What defines the right customers for us?” The answer will vary from business to business, so there is no common list of attributes that you can borrow with confidence. But if you take the time to really think about this question, you should be able to create a list of characteristics that describe your ideal, or nearly ideal, customers.

Generally, this exercise asks you to match your vision and capabilities with the needs and wants of your potential customers. It also requires you to come to terms with the notion that there are some folks who just shouldn’t be your customers.

There are many good reasons for this. Two of the most common include the fact that your company simply may not be equipped to serve some particular customers to their satisfaction and that some customers may make demands upon your firm that are unreasonably onerous.

Some businesses ignore their own inability to serve particular customers to their satisfaction. They continue to work hard, committing to new client engagements, and continuing to fall short in delighting the customer and in generating profitable return business.

There are many firms, however, that recognize early that cultivating the right customer is good both for them and for the customer. And they also learn, and indeed are happy, to let another firm serve those who are not “the right customers” for them.

For example, a well-known discount clothing chain uses this phrase as its tag line: “An educated consumer is our best customer.” This phrase is both flattering and discerning. When we shop at this chain, we like to think that we are indeed educated consumers and not just another casual shopper. On the other hand, the tag line and the stores themselves also tell us that we’d better be educated, because we won’t get a lot of service here. This is a place for bargain hunters who know what they want and are willing to spend the time to find it, without the help of highly trained customer-focused store personnel.

Some customers may also be undesirable because they make unreasonable demands upon your firm. These demands may be intentional or not, but the results are the same: you are unable to transact business to either satisfy the customer or to generate a reasonable profit.

Oftentimes we define the right customer as one that gives us lots of sales. In most businesses, it is common to find that a large proportion of the sales (for example, 80 percent) are obtained from a small proportion of the customers (for example, 20 percent). This is the so-called 80/20 Rule, which is often used to identify our major customers, the ones that we frequently refer to as our “good customers.”

The converse interpretation of the 80/20 Rule, of course, is that a majority of our customers (for example, 80 percent) may account for only a relatively small proportion of sales (for example, 20 percent). At first blush, then, it seems logical to think of these folks as our “small customers,” and to conclude that they are of lesser importance than the “big boys.”

Unfortunately for those of us who seek simplicity, this may or may not be true. For example, we might have a big client, accounting for a large proportion of our sales, who makes enough demands upon us that we actually lose money, or make very little, on their transactions.

Similarly, a too-small customer may not be a good one if the costs required to process a sale leads to low profitability (transaction costs are too high). Conversely, that same “too-small” customer may be a good one if that small initial order will lead to a long-term profitable relationship, or if we can determine how to lower the transaction costs.

These examples only further illustrate the value of defining the right customer. Remember that the characteristics of the right customer are specific to your firm—you’ll need to think carefully about the attributes that you value in your customers.

Here’s an example. We haven’t talked with the discount clothing firm we referenced previously, but we might guess at the characteristics for their right customers. Here they are:

- Frequent clothes buyer.

- Likes shopping for bargains (price is an important issue).

- Likes to browse/shop without a salesperson (confident of what they want).

- Needs minimal alterations (fits the standard sizes).

- Likes brand-name clothes (especially if inexpensive).

- Unconcerned about store ambiance. (Why should I pay for marble floors?)

- Willing to return multiple times to find the right thing. (It’s like a treasure hunt.)

The staffing implications for this retail clothier are fairly obvious. They don’t need a team of old world tailors and gentlemanly sales people with decades of fine clothing experience. They need a competent tailor, some savvy purchasing managers to find those bargain clothes, and some fast-working floor clerks and warehouse folks to keep the merchandise moving. This results in a decades-long business that satisfies a distinct segment of the market.

Now let’s contrast those characteristics with a firm that supplies critical-function computer services to other businesses. The list of right customer characteristics might include:

- Depends upon us for quick response to problems.

- Appreciates our high-quality products and services.

- Willing to pay premium prices (price is not an issue).

- Wants guidance and consultation on services.

- Appreciates our frequent maintenance visits.

- Likes having a strong relationship with us.

- Loyal—unwilling to shop around if receiving good service.

The staffing implications for this firm are significantly different than for the clothier. This firm needs highly skilled technical people who can act as trusted advocates for the success of the customers. The staff must be customer-focused and able to deliver complex solutions in a short time. They need to be skilled communicators and strong relationship builders. This results in a business that can charge premium fees and assemble a growing list of loyal customers.

Obviously, you should define your right customers carefully. That will allow you to create the right strategies and processes to acquire and satisfy those customers. These include the ways in which you identify and target those customers, as well as the ways in which you sell to them and operate your day-to-day business to satisfy and delight them.