UK retail banks make 140 per cent to 170 per cent of their profits from 10 per cent of their customers.
Now let's look at the proposition that having customers makes you profitable. Well, clearly it doesn't otherwise companies wouldn't fail so spectacularly, taking customers' money with them.
We need to find out what a profitable customer looks like. Write down right now your five best customers.
It’s easy to know how much a customer spends with you, but the fact is that customers don't automatically make you money. They eat your profit. Customers are a business activity and like all business activities there is a cost.
As we discussed in the white paper on costs, we can identify which products generate profit and which consume profit as well as unused resources.
Can we do this with customers? Yes.
Should we? Definitely
If we can become aware of the costs of our customers we can start to take action.
Usually these costs are hidden in the general budgets, but some companies have become aware:
One international parcel company discovered that a single customer enquiry over the phone consumed the entire profit from the next six parcels that it carried for the customer.
When it was still called Thomson, the large French electronics company did not pay commission to its salesmen until the customer had paid. This made sure that the sales staff did get then money and effectively allocated the cost of debt chasing and after sales service to the specific account.
Microsoft recharges customer service costs back to the product manager, to reflect the impact of releasing products before they are sorted out.
Often in small businesses selling to the consumer, dealings tend to be transaction-based. In a business to business environment, customers tend to have a longer relationship and we need to view the value that we gain from the whole lifetime of that customer with us, rather than just the individual transaction. So we can take our consumer market and find a suitable segmentation so that we can regard these as long-term customers.
So how do we recognise a good customer? Profitable customers are those who leave you with more money than when they arrived. Most will provide you with revenue, but is this profit? There is no golden measure to guarantee whether a prospect will be profitable. Customers are individuals, they aren't lines on a sliding scale and need to be regarded as individuals.
We need to understand how much we spend on the customer. Thus we know whether the customer is profitable, not a just a big spender. And then we can decide whether we want to invest in that customer.
It’s not about making customers more satisfied. It is a given that it costs over five times as much to recruit a new customer as retain one. And CRM vendors will tell you that customer satisfaction drives up loyalty. Yet Manchester Business School has found that satisfied customers are 65% loyal but very satisfied are 95% loyal. However American automobile manufacturers typically have satisfaction survey results of close to 90%, but repurchase rates of 30- 40%. And then some customers of big software companies are very dissatisfied but very loyal as they can’t get off.
The real issue is that satisfaction doesn’t automatically mean profit. Customers can be satisfied because you spend lots of time with them, underprice your products or just bend over backwards: all these are costing you money, your money.
Knowing the costs of everything we do means that we can decide how to change the relationship with the customer: drive customers away from costly interactions; away from low-margin products; or just away?
Now write down who you think your best customers are. Has the list changed from the one you wrote down at the start?
Isn’t it time to do something about it?