Identifying where to properly allocate valuable resources should be paramount for any business. An essential component of this strategy is figuring out which customers should be a priority for your business. See the following article from The Street for more on this.
Every organization has to do it: Decide which customers and projects have the highest priority and get the most resources. For some it is a matter of necessity; there’s just not enough time, people or other resources to support each customer equally. Some customers are just "needier" (meaning "high maintenance") than others and want more attention and interaction. Other customers may have actionable items critical to their organizations, and when they call you need to respond yesterday with everything you have available.
Some options for prioritizing customers include by:
- Sales volume (dollars or units)
- Gross margin on sales
- Length of established relationship ("They’ve been with us a long time")
All of these are valid, and each has its upside and downside. For instance, sales volume — whether in dollars or units — doesn’t tell the entire story. What was the sales price? Were there discounts? How long does it take the customer to pay? From a financial perspective, looking at the net sale after the cost of the sale is deducted (sales price minus cost of goods/services sold) begins to let you see how much is left over from a sale after paying for other expenses.
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The length of a relationship with a customer is an important element in decision-making and priorities. The life of the relationship with a smaller annual sales volume may be much more valuable than a large one-hit-wonder sale that produced little profit after deep discounts.
If you are setting priorities for clients (or prospects) in which to invest your limited resources, you need more than a single criterion to go by. In addition to the three above, you should look at a bigger picture that often extends beyond direct sales to a customer:
- Length of relationship: including lifetime sales and profits
- Annual sales and profits
- Profit margin on each sale and total sales
- Terms and speed of payment
- Referrals and references: pipeline to new customers
- Maintenance level: easy interactions (low need for attention) to high maintenance (high need to make sales and follow up)
- Credibility of the client: Some clients are worth the time, effort and investment because of their influence on other buyers, connections to the community and reputations. Some can make (or break) your business.
Underlying the decision to prioritize your use of resources in client relationships is a need to do what is best for your business. Every client is important and should be appreciated and respected if you want to keep them. Taking clients for granted or giving them less respect because they aren’t your top priority is a fast way to lose customers — the high-maintenance ones and the good ones.
While every customer is not created equal and logically can’t get the same time and attention, developing the ability to control the use of resources with less-profitable customers to maintain an effective relationship is critical to keeping your reputation and profitability. Never make assumptions about the "little guy" who isn’t buying much. Invest a bit of time to understand that customer and see if there is potential to grow the relationship. Invest time and resources on a controlled basis to keep in touch, understand how your customers are changing and ensure the customer knows what you have to offer.
The bottom line to improve your organization? Have a clear financial and operational picture of the activities, expenses and investments being made into each customer. If you don’t know if a customer contributes to your profitability (or costs you money), you can’t know where to spend your resources. To improve your financial position and compete in the marketplace, know your customers. Understand what each contributes to your organization, including directly through purchases, indirectly through referrals and over the life of a relationship. Every customer is important; make sure they know it … but not at the expense of your bottom line.
This article has been republished from The Street. You can also view this article at The Street, a site covering financial news, commentary, analysis, ratings, business and investment content.