Strategic Relations Journal

Subscription information is available at the end of this newsletter.
Brought to you by Justin Hitt, Strategic Relations Consultant. Thank you for reading.

Issue #57 -- November 4, 2002

A weekly journal about building stronger relationships in business.
Subscription information is available at the end of this newsletter. Thank you for reading.

Where is time going, it's already November. I certainly hope your achieving everything you had planned for this year. This issue is about ?The Role Profitable Customers Play in an Effective Business,? these customers got you to where you are today so now is a good time to consider them.

From last week's issue, do you now have a better understanding of business relationships? While a bit abstract at time, I hope you see how the underlying relationships of interactions inside your organization can influence the market place in a positive way. While some of these strategies are touch on in organizational psychology, what I teach here is heavily influenced by systems thinking and process management. If ever you have any questions, please write anytime questions-strategic-relationsat

On with the theme of profitable customers, next week I will share with the some of the differences between normal customers and those who are profitable. You will find many characteristics that may not have been considered in the past. I know you will enjoy it, but more importantly turn it into income through stronger relationships.

Respectfully submitted,

Justin Hitt
Strategic Relations Consultant, Author & Speaker

Ps. While I spend a bit of time reading your wonderful feedback, I would also enjoy answering your questions about strategic relations. The Strategic Relations Journal is a ?retainer service? as much as a newsletter. If you have not reviewed, the subscription benefits lately consider visiting in the subscribers? area. I'm here to serve you.

The Role Profitable Customers Play in an Effective Business

By Justin Hitt, Strategic Relations Consultant,

While many companies are happy to sell to any customer, the profitable customer provides stability and an opportunity for growth. Without customers who generate real profits your business just cannot stay in business. Third-party investments and bank loans can help you get started, but without significant profit, you will never get out from under that crutch and will eventually fail as a business.

The Purpose of Business

The only purpose of business is to generate profits that are reinvested into achieving the businesses purpose or objectives. No matter what purpose you have for your company, your profits must come from somewhere. The most sustainable source of profits is a customer who receives value from your products or services.

While quite elementary, the late 1990's showed us thousands of companies who felt they could run a business on an idea alone. Perhaps many of the companies were ahead of the times in thinking, but unless a customer is willing to buy a product that can produce a profit, you do not have much of a business. Investments and loans cannot keep a company afloat no matter how exciting their idea is.

If it was not the will of the customer we would be using manufacturing techniques of the early 1800's -- it was demand that pushed upgrades. While in fact, some industries still use antiquated or seemingly inefficient manufacturing processes it is more the will of the customer than being behind the times. Even when the industry considers something old fashion, it can be a point of differentiation if positioned in favor of customer wants. Do you see how important it is to sell something the customers want?

A Customers Wants Verses Needs

It is important to differentiate between customer wants and customer needs. While you seek to fulfill needs in your market place, the customer purchases those things they want. You must provide what the customer wants if you desire any success in business.

The key is to sell them what they want, while providing them what they need.

Defining a Profitable Customer

A profitable customer is defined as an account that can be provided products or services while generating an income that exceeds your operating costs in regards to that customer. While an effective company, has enough profitable customers to sustain improvements in product, services, and infrastructure with capital left over for future growth. Notice nothing was said about a companies ability to attract investors, or generate income on non service measures -- those means of generating profits are extra and should been seen as a means to expand to meet future needs (not necessary for daily operations.)

An effective company achieves growth through profits received from customers; this is the most stable means of running a company. For consistent growth, a company must have a base of customers who provides a regular amount of profit. As a collective measure, these profits can be calculated into quarterly cash flow projections keeping a company in operation. While some companies can produce huge margins, others are in the single digits. Where does your company stand within this range and how can it improve?

Remember, not all customers are profitable all the time. Some customers are even unprofitable, generating little or no profit per transaction. Effective companies know the difference between these two types of customers and seek to serve those who are most profitable. While customer volume might look good on your books, quality matters most to your long-term achievement.

Points to Consider

In some industries, your price point plays an important role in how much you can earn. If your market is saturated with other suppliers, a competitive price might squeeze your margins to an unusable size. How do you differentiate your company to justify higher price points that sustain profits?

Another consideration is your organizations transaction costs. You will have a generally fixed overhead, but what it costs you to transact the delivery of your product or service could vary from customer to customer. Some customers cost more to serve; perhaps they are more likely to request frequent pre-sales support, have a high rate of returns, request post sales consideration that eats into profits, or maybe they purchase at such a low volume that it costs more than you receive. What is your total cost per transaction and do you consider this when deriving price?

Your customer's willingness to purchase is very important too. The more frequently you can get them to return for additional sales (especially the profitable ones) the more they contribute to your company�s long-term stability. You may have a clear understanding of customers �needs,� but their �wants� closes the sale. Do you provide a product or service your customer wants to buy?

Simplified Supply and Demand

There are more vehicles owned by individuals than in fleet management, while fleet vehicles are some of the most fuel efficient and durable vehicles in the world. Why do you think that is? It is because fleet managers want vehicles that are easy to maintain with low operating costs, while consumers have wants that are more ascetic. If tomorrow consumers collectively wanted high value fuel-efficient vehicles, they would be a greater variety of such vehicles available. The demand would justify the supply.

A final consideration in the role profitable customers� play in an effective business is what is left over after all the bills are paid -- your profits. If after you complete a transaction with a customer you did not make any real money, then as a business you have not achieved anything. In every transaction, you should strive to break-even over the transaction period. Do you produce some sort of profit with every customer over your transaction period?

There is a relationship between price point, the transaction cost, a customers� willingness to buy, and the cash remaining after costs. Effective companies consider each of these points and understand the profitable customer pays a disproportional amount of your operating costs. Your profitable customer lubricates the relationship between these points while you tune them per your industry or market place.

Being an Effective Company

In order to be an effective company you must produce a baseline income structure sustained by its own profits. This income structure can be based on a certain product line, industry niche, sales channel, or other repeatable business process. The customers within this stable stream of income are most likely your profitable customers.

By producing a number of these income channels, you can stabilize revenue for your company while generating profits that can support or expand new lines. Market focus and concentration is important to your customers understanding of your expertise. Being identified as great in a few profitable niches will earn you more than being mediocre everywhere in your industry. Does your company focus on a specific and profitable �income structures� that pays for themselves?

The role of profitable customers to an effective business is to provide a sustainable income over the costs of serving them. In this, you will be able to improve your organization while growing on its own momentum. Once you are able to do this there will be nothing that can stop you from your business objectives.

© 2002 JWH Consolidated LLC dba Center for Strategic Relations, All rights reserved.
/ profitable-customers | cultivate-topten /

Justin Hitt is a Washington-based Strategic Relations Consultant who helps business to business executives build stronger relationships in business that lead to more sales, increased profits, and greater satisfaction in business. Visit his website for more information,

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© 2002 JWH Consolidated LLC dba Center for Strategic Relations, All rights reserved. Rights granted to forward, via electronic medium, this document in whole as long as the subscription and copyright portions remain intact. Dept HIP,PO Box 3123, Martinsville, VA 24115.

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