Strategic Relations Journal

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Brought to you by Justin Hitt, Strategic Relations Consultant. Thank you for reading.

Issue #58 -- November 11, 2002

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

Knowing which holiday subscribers are celebrating is one of the most difficult things about writing for an international audience. Here in the United States today is Veterans Day, subscribers in Canada are celebrating Remembrance Day, while folks in Europe are observing Armistice Day. No matter what country you are in, the spirit of the holiday is the same -- Let us honor the commitment of those people that enable the freedoms that allow us to work as we do. Thank you veterans of all nations for what you do in support of your country.

This week I bring you ?Differentiating Factors between ?Normal? and ?Profitable? Customers? which shares 15 ways to identify those customers who contribute to the profits of your business. This article is an excerpt from an upcoming report by a similar name, which includes facts about profitable customers. Stay tuned for an announcement about its availability. (I will see about getting you a free copy.)

After last weeks article you may better understand the role of profitable customers. This week's article should expand that knowledge to help you start segmenting your customer base. Have you gained any insight that helps you tune the relationship you have with those most profitable customers?

Next week I will touch on getting closer to your most profitable customers. While I have touched on this topic in the past during speaking presentations, I think it is important to consider. If there are any points you would like addressed in this or any other upcoming article, please write questions-strategic-relationsat

Sincerely yours,

Justin Hitt
Strategic Relations Consultant, Author & Speaker

Differentiating Factors between �Normal And �Profitable� Customers

By Justin Hitt, Strategic Relations Consultant,

Imagine knowing which customers generate greater profits for your business, and imagine being able to tap this knowledge to grow customer base. One of the keys to understanding your most profitable customers is knowing the difference between normal customers and them. These differentiating factors contribute to your ability to target and segment customers to create the greatest profits for your business.

While these differentiating factors carry different weight in different companies, they provide a means to understand the importance of this simple form of customer segmentation.

  1. Profitable customers cost less to serve over normal customers by definition. When considering your total cost to deliver products or services to a customer, by definition profitable customers generate a greater return on each dollar invested. Over time, these customers continue to cost less to market, serve, and sell. Look for traits representing customers who continue to buy without a lot of effort on your part.
  2. Profitable customers are members of a niche marketplace. In most cases, your profitable customers will represent a niche marketplace or subset of the audience your company serve. This provides an opportunity to expand your product line to serve their needs through customization or specialization. Be aware that these changes to your product line could adversely change the profitability of other customers, so be sure to test enhancements in this area.
  3. Profitable customers purchase more frequently or at greater volumes than normal customers do. Small frequent purchases cost more than large infrequent purchases because a companies transaction costs tend to be the same within certain size variation of order. Profitable customers keep your costs low by placing orders that are filled at a minimum cost. Look at ways you can reduce your transaction costs by grouping customer orders, providing fulfillment services, or even shipping on customer inventory thresholds.
  4. A profitable customer gives you a greater percentage of their total purchase in a certain area. It is likely you are not the only company provide the products or services you do. When a customer can purchase a greater volume from you without increasing their total purchases in that area, they are considerably more valuable than a customer who is buying all they can. Even low volume customers have the potential to spend more of their money with you, look for this type of customer.
  5. Profitable customers are the perfect model to identify ideal prospects. Since you know, you can profitably serve customers in this demographic or selection criteria it would make since that acquiring more customers like them would be valuable to your business. You will gain normal customers as a by-product of targeting your most profitable customers; do not put any effort into acquiring them directly. Concentrate your efforts on those prospects you know will build your business profitability.
  6. A profitable customer provides feedback that is more frequent. Normal customers tend to be a bit ho-hum about feedback, they may not know enough about your product or purchase at such low volumes that they do not have any to contribute. Profitable customers have genuine concerns about the quality of your product, improving the relationship, or reducing their own costs. Learn how to cultivate feedback and use it to improve your business.
  7. Profitable customers require less technical support. This type of customer has their own staff to handle technical support issues, which means they spend less time with your people in nonpaying support. Normal customers on the other hand may not have the resources to solve their own technical problems, so they will burden your company to get the answers they need. Consider low cost technical support programs or focusing more on the type of customer who solves their own problems without tying up your resources.
  8. It is likely your profitable customers are leaders in their industry. It is a matter of quality in targeting profitable customers, and they are usually the best you can find in what they do. Where normal customers tend to be struggling, not sure what resources they need to achieve their own goals, perhaps purchasing sporadically to match their own sales demands, your more profitable customers are more established. You want customers that are stable enough to provide consistent income for your business.
  9. Your profitable customers pay on time or within terms. While normal customers may purchase in higher volumes, when they do not pay on time they burden your cash flow. The faster you get receivables into your business, the sooner you can turn that capital back into more income or cover expenses. Consider timeliness in payment when looking for your profitable customers.
  10. Profitable customers have a better handle on their own inventory. It is very likely that profitable customers to whom you are serving only purchase what they need to provide their products or services. They keep inventory levels consistent with their own demand which prevents rush orders or surplus inventories that might create future returns. Normal customers on the other hand do not necessarily have this same control on inventories causing over purchases, delays in receipt and other issues that put your products at risk.
  11. Your profitable customers are open to peer integration that serves their needs. If by consolidating their purchases with a number of peer businesses they can get better terms or volume purchasing rights, profitable customers will do it. Many purchase through trade associations or through distributors to reduce their costs and make inventory available to suit their own needs. Consider customers hidden in your supply chain, those being served by distributors and resellers when defining segmentation criteria for profitable customers.
  12. Since profitable customers generate more return on dollar invested, they earn the right to preferential services. Those customers who generate the greatest return on your dollar invested deserve preferential services in exchange for feedback, larger volumes, or greater good will. You can afford to give these extras to invest in the business relationship because they have already paid for them, where normal customers cannot justify this special treatment. Of course, there is nothing wrong with selling normal customers those �extras� you give to your most profitable customers.
  13. Your profitable customers know top businesses, which they could refer to you. Birds of a feather truly flock together. It is likely a rich source of referrals is available within your most profitable customers; all you have to do is just ask for them. This is not to say normal customers do not have the same access, but because of other factors, profitable customers are more likely to share referrals worth more to your business. Ask everyone for referrals, but pay special attention to the ones shared by your profitable customers.
  14. When selling to profitable customers, they require less pre-sales support. At times normal customers do not know enough about your products to make a purchase without a lot of uncompensated pre-sales support. In order to keep your costs low, you want customers that can simply call up and place their orders. Do not discount customers just because they take to long to make a decision, it is possible that after the initial sale, they will be able to make orders without any pre-sales support.
  15. Profitable customers pay a disproportional amount of company overhead. These customers truly pay your bills over normal customers. In every interaction, make sure they know you appreciate them, do not risk losing them to the competition over minor requests they may have. As long as a customer is profitable or has the potential to be profitable, they should get special attention that lets them know how important they are to your business. Keep these customers happy even if you have to break even at the beginning of your relationship.

Profitable customers are very important to your business since they provide both stability and growth. The normal customer provides enough income to get by, where a profitable customer covers their cost plus providing some money left over to invest in growth. With enough profitable customers, a business can afford to invest in low returning customers that may yield more profits in the future.

Once you identify your profitable customers, you now know who you can invest in to produce new business. Since profitable customers provide you more return on each dollar invested, adjusting your marketing efforts to reach more of these customers will provide you the best results. Utilize these differences to focus in on those high reward customers and your business will prosper.

© 2002 JWH Consolidated LLC dba Center for Strategic Relations, All rights reserved.
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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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