Here’s a hard statistical fact — 20% of customers account for 80% of any company’s profit. Whether you are in the wholesale, retail, c-store, or propane sector of the industry, 20% of your customers are really great, 60% are pretty average, and another 20% are not-so-great (translation – you may actually lose money on them!). The trick to a successful, profitable business is knowing which is which and then capitalizing on that knowledge.
One way to easily tackle this challenge is through customer stratification. The simplest is an ABC ranking method. “A” customers are your best customers in terms of bottom-line profit, “B” customers are average and “C” customers are those you lose your shirt on. Here’s how to stratify your customers and what to do with that information.
Beginning with the wholesale sector (we’ll also cover retail later), “A” customers are those with good margins, normal delivery procedures and prompt payment. “C” customers have low margins, difficult deliveries and pay late. “B” customers are everyone in-between.
Once you’ve determined who is who, then what? Well first, everyone in your organization should know who the “A” and “C” customers in your company are. Preferential treatment should be given to the “A” customers. Since it’s always the “C” customers, however, who call and want immediate service, often an “A” load gets bumped. Delivery is then made to the “C” customer just to get them off the dispatcher’s back.
Since “C” customers call frequently with lots of extra service requests, “C” usually befriends your staff while your big dollar “A” customer, who rarely bothers anyone for anything, is treated like a second-class citizen.
By ignoring an “A”, they become easy targets for your competitors who will delight in asking them, “When’s the last time you saw your rep?” or “What have they done for you lately?” So, make sure each “A” is treated with the extra attention and service they deserve.
Now on to the bottom of the barrel — your “C” customers. First, determine if each account is worth keeping. If you lose money on an account after factoring in service, you must raise margins or collect fees to make each account profitable again. If new fees drive them to your competitor, so be it. Better that your competitor loses money serving them than you!
With “B” customers, your goal is to bring them up to “A” customer status. Can you sell them more products? Raise their margins? Get them paying more promptly? Some “B”s will always be “B”s no matter what you do and that’s OK. Just make sure you don’t allow them to become “C”s!
Now on to retail customers. You’re likely thinking this ABC stuff works great for wholesalers, but I’m in retail. How do I possibly segregate my customers? The answer is customer profiling. By using your register data, you’ll find once again that 20% of your customers produce 80% of your gross profit. Therefore, we want to cultivate these “A” profile customers and market directly to them, increasing our sales and profits.
Identifying these retail customers is a bit tricky, but not impossible. In fact, grocery stores use their loyalty card programs for this exact purpose. Each card keeps track of every dime a customer spends and on which products. Although you may not have the technology or funds for a loyalty program, here’s how you can get close.
First, do a little work to identify the ticket size of the top 20% of your customers. This means getting store transaction data, dumping it into spreadsheet, sorting from most total sales dollars to least, then seeing where the line for the top 20% falls. Let’s say you do that and find a ticket size of $20 is the 20% line.
Next, have your cashiers request that $20+ sales customers fill out a quick survey. For completing the survey on the spot, they receive a coupon for a fountain drink (or other item of your choosing). The survey should ask these questions:
- How frequently do you shop at our store? (Daily, more than once per week, weekly, etc.—multiple choice)
- Home zip code
- Reason you selected our store (multiple choice—check-off)
- What did you buy today?
- If you could change one thing about this store, what would it be?
- What product or service would you like to buy that we are missing?
With this information, you can now cater store and product offerings to “A”s. By knowing where they come from, you can develop a target marketing program that with persistence, will produce more “A”s and certainly more profit! You also need to take a hard look at the bottom 20%, your “C”s, to determine what these folks are buying. If the “C”s are the only ones buying any product, get rid of it.
In summary, it pays to know your “A” and “C” customers and then act on that information. Cater to “A”s and seriously considering dumping “C”s if you can’t make them profitable.