KNOWLEDGE

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Who brings your profit?

Customers aren't equal. Some are worth more to you than others, some nothing at all. Many have negative value: Every time you sell them something, you lose money. Nor will they ever become profitable. Yet many companies spread their marketing in a thin, even layer over the entire field, instead of focusing it where it pays off most.

Pareto and Marketing

Marketing is subject to Pareto's Law, a.k.a. the 20/80 rule: 20 percent of a product range accounts for 80 percent of the earnings; 20 percent of the sales force generates 80 percent of sales; 20 percent of the subsidiaries generates 80 percent of the profits; 20 percent of the customers accounts for 80 percent of the sales volume. And so on. The ratio may even he 10/90.

ABC analysis is a reliable way to get a grip on the situation. First you arrange your customers on a sliding scale of sales volume and margin contribution, then you divide them into three or more categories: "A" customers make up the 10 percent that provides 70 percent of your margin contribution; "B" customers comprise the 30 percent that provides 20 percent of the contribution; and "C" customers are the 60 percent that accounts for only 10 percent.

Who to keep happy?

Providing efficient service to "A" customers and keeping them constantly satisfied clearly becomes your top priority. Even when your "A"s have no immediate need to buy, you should maintain some kind of contact that is meaningful to them, through service calls, seminars, newsletters, technological information or special offers. "B" customers won't require quite so many calls, and "C" customers may require none at all, or maybe simply direct mail and catalogues.

When you've used ABC analysis to establish who your most profitable customers are, you can follow up with a twin analysis. You start by studying what characteristics your "A" customers have in common, such as what industries they operate in, for which applications they use your products and what type of services they demand. This allows you to systematically identify prospective customers in your market who share the same characteristics as your "A" customers. Such twins should then become the primary focus of your drive for new "A" customers and new sales.

Stop chasing everything that moves

Once a company stops chasing everything that moves and starts giving its best customers and prospects the VIP treatment, its sales success ratio, average size of orders and profitability usually soar.