How do you, as a business owner, determine which customers you spend the most time with, the most money with, and the most resources on? Do you have a plan or strategy for identifying your "high-value" customers, your "solid as a rock" customers, your "could be better" customers, and your "really there is nothing there" customers? Unfortunately, many companies and small businesses do not have such a segmentation plan. This results in undisciplined customer interaction and higher amounts of customer attrition and defection and overall customer disappointment. One critical way to reduce your customer attrition is to develop a customer segmentation plan. Customer segmentation is a relatively easy thing to accomplish. Companies need to do several things to do this, but once you begin this, you can complete this in short order.
Know the Margin
It is first important that you know who your customers are. You can easily do this by either printing out a list of your customers or entering into your customer relationship management (CRM) software system. Once you have done that, you should alphabetize them or number them from one to whatever number you have in terms of customers. Next, take a step back and ask yourself, "do you know how much money you make from each particular customer"? Again, more often than not, you will not know this at all. Unfortunately, many small businesses have not taken the time to understand customer profitability. However, take heart; companies can do this relatively simply using what is, effectively, a back of the envelope calculation. The back of the envelope calculation involves nothing more than looking at gross margin that you have for each customer. It should include overall gross margin on all of the products you sell to the customer. As an example, if you sell home insurance, life insurance, and disability insurance to a customer, you should include the gross margin of all three as opposed to the gross margin on just that one product. You should then think about taking your weighted average or blended average for all of the gross margins of the products you sell to a customer.
Know the Hassle Factor
Next rank order the gross margin on every customer against all others and identify your most profitable and your most unprofitable customers. Another, simpler, way to complete this customer profitability exercise is to take even one-step further back. This involves you simply ranking looking at each customer and putting them into one of four categories these categories would be "high", "medium", "low" and "shed". A good question to ask is, "how do you know which category in which to put this customer"? The answer is more of a gut feeling based on two or three factors. One of the factors could be a "hassle factor". If, for example, your customer always is complaining about your prices, your services, your service level, or your employees, they may be in the category of "shed" or "low value". After all, if they are generally unhappy, they probably make you unhappy, so why deal with them? Perhaps they are not the kind of customer you want to serve. Conversely, if your customer is consistently referring you to some of their friends and some of their customers, they might be in the "high" category. Two other categories that help you determine in which bucket each customer should fall would be the number of products they have with your company. Along with the gut feeling of the profitability for each customer, this back of the envelope method is a lot more art than science. However, for the purposes of understanding basic segmentation and from the "80/20 perspective" it will be more than effective.
Know the Plan
Then, once you have identified a profit factor on each customer, it is important to put him or her into his or her buckets again as was alluded to previously. You might decide to have a high value, a median value, low value, and a shed bucket. Alternatively, you might decide to use the high potential, growth potential, cash cow, or shooting star moniker. Whichever method or categories you decide to use, whether it is 3-4 categories or 14, it must make sense for your business. Generally, the recommendation is that there are no more than 3 to 5 separate categories to manage. Place all your customers into their respective categories. Finally, now that you have identified the segment to which they belong, it is now your responsibility to identify how often you contact them, how you will contact them, how much you will spend on them, the level of service your extend to them, and to what level you go about attempting to retain them.
Know the Impact
With this new discipline employed, you will now be able to understand how important each segment is to your bottom line. More than likely you will quickly understand that 20% of your customers generate 80% of your profits.
It is important to note that even though some of your customers may be unprofitable customers or even marginally profitable customers and a "pain in the neck", you should always treat them with respect. Never forget that they are still customers and they are giving you their greatest asset "their trust to serve them". If you decide, however, that you no longer want to serve them or that particular segment, there are some very politically sensitive ways to move them out of the relationship or move them into a higher category of profitability.
If you segment your customer base, you will do what few other small business and medium-sized businesses currently do today. This will result in you being able to spend more time with your better customers, add more value for all your customers, reduce your attrition and make more money for yourself and your company.
Know the Margin
It is first important that you know who your customers are. You can easily do this by either printing out a list of your customers or entering into your customer relationship management (CRM) software system. Once you have done that, you should alphabetize them or number them from one to whatever number you have in terms of customers. Next, take a step back and ask yourself, "do you know how much money you make from each particular customer"? Again, more often than not, you will not know this at all. Unfortunately, many small businesses have not taken the time to understand customer profitability. However, take heart; companies can do this relatively simply using what is, effectively, a back of the envelope calculation. The back of the envelope calculation involves nothing more than looking at gross margin that you have for each customer. It should include overall gross margin on all of the products you sell to the customer. As an example, if you sell home insurance, life insurance, and disability insurance to a customer, you should include the gross margin of all three as opposed to the gross margin on just that one product. You should then think about taking your weighted average or blended average for all of the gross margins of the products you sell to a customer.
Know the Hassle Factor
Next rank order the gross margin on every customer against all others and identify your most profitable and your most unprofitable customers. Another, simpler, way to complete this customer profitability exercise is to take even one-step further back. This involves you simply ranking looking at each customer and putting them into one of four categories these categories would be "high", "medium", "low" and "shed". A good question to ask is, "how do you know which category in which to put this customer"? The answer is more of a gut feeling based on two or three factors. One of the factors could be a "hassle factor". If, for example, your customer always is complaining about your prices, your services, your service level, or your employees, they may be in the category of "shed" or "low value". After all, if they are generally unhappy, they probably make you unhappy, so why deal with them? Perhaps they are not the kind of customer you want to serve. Conversely, if your customer is consistently referring you to some of their friends and some of their customers, they might be in the "high" category. Two other categories that help you determine in which bucket each customer should fall would be the number of products they have with your company. Along with the gut feeling of the profitability for each customer, this back of the envelope method is a lot more art than science. However, for the purposes of understanding basic segmentation and from the "80/20 perspective" it will be more than effective.
Know the Plan
Then, once you have identified a profit factor on each customer, it is important to put him or her into his or her buckets again as was alluded to previously. You might decide to have a high value, a median value, low value, and a shed bucket. Alternatively, you might decide to use the high potential, growth potential, cash cow, or shooting star moniker. Whichever method or categories you decide to use, whether it is 3-4 categories or 14, it must make sense for your business. Generally, the recommendation is that there are no more than 3 to 5 separate categories to manage. Place all your customers into their respective categories. Finally, now that you have identified the segment to which they belong, it is now your responsibility to identify how often you contact them, how you will contact them, how much you will spend on them, the level of service your extend to them, and to what level you go about attempting to retain them.
Know the Impact
With this new discipline employed, you will now be able to understand how important each segment is to your bottom line. More than likely you will quickly understand that 20% of your customers generate 80% of your profits.
It is important to note that even though some of your customers may be unprofitable customers or even marginally profitable customers and a "pain in the neck", you should always treat them with respect. Never forget that they are still customers and they are giving you their greatest asset "their trust to serve them". If you decide, however, that you no longer want to serve them or that particular segment, there are some very politically sensitive ways to move them out of the relationship or move them into a higher category of profitability.
If you segment your customer base, you will do what few other small business and medium-sized businesses currently do today. This will result in you being able to spend more time with your better customers, add more value for all your customers, reduce your attrition and make more money for yourself and your company.
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