It should be simple;
some customers are costing you money, so fire them! Activity-based cost accounting has dramatically shown that for most
businesses 20% of customers generate all the profits, while 60% of customers help to cover fixed costs but are basically breakeven,
and 20% of customers actually are a drain on profits. With this ‘client topography’, it would seem logical
that all any business needs to do is jettison its unprofitable customers and watch the remaining dollars flow to the bottom-line.
But, of course, the devil is in the details. In particular, identifying costly customers and, for that matter,
identifying currently profitable and potentially profitable customers has been challenging. Some businesses naively
believe they know their best customers because they must be the ones spending the most, or those in the highest tiers of a
loyalty/points program. In most cases these indicators are overly simplistic and may not be accurate indicators of truly
Then, How Do You Identify Costly Customers?
To properly identify those customers that you might want to lose, and for that matter to identify those customers
who deserve extra effort to be retained (because they are most profitable) we have promoted a scoring system we call SLP2
(as in Satisfaction, Loyalty, Profitability and Potential).
Each component has its own source. Satisfaction is scores generated through survey feedback capture.
Loyalty is a measure of historical buying behavior. Profitability is modeled from
servicing costs including: discounts required to close sales and demands for after-sales servicing. Potential
is based upon the share of category spending currently allocated to the brand by each customer.
We've Come a Long Way
When we first introduced SLP2 to the world some fifteen years ago,
it was, to be kind, ahead of its time. We were frequently told (either correctly or incorrectly), “We can’t
access that information!” And in fact, most marketers lacked the systems to precisely track individual customer’s
buying behavior or to model profitability. But that was before CRM software and the popularity of ‘big data’.
With today’s information capture systems, most services and many goods manufacturers can now access an entire history
for every one of their customers! Further, most corporations regularly track customer satisfaction, and many no longer
shirk from asking share of wallet spending questions (to determine potential).
the potential for really making efficient and effective use of all that information. Identifying the most valuable
and the least valuable customers for the future of your business can take marketing and customer service strategy to a smarter
and more profitable level.
A Final Word About 'Firing' Customers
By the way, for all those who read to the end of this column, we at Customer Experience Partners, strongly
recommend against ever “firing” any customer. If possible, we recommend directing them to a product
and service mix that turns them into at least a breakeven customer for the company. Should that fail we recommend finding
a way to introduce and escort them to a competitor. It will save a lot of pain for everyone and avoid a lot of potential negative
word of mouth.