Strategic Relations Journal

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

Issue #60 -- November 25, 2002

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

Today's lesson brings you "A Profitable Customer is a Matter of Measure," where you will learn why it is important to have the right measures of profitability, why measures vary from company to company, and how to develop measures useful for your organization. This article continues the series of tips to help your company engage customer in a profitable manner, while building stronger relationships.

After last week's lesson, are you any closer to your customers? I hope you see the importance of really learning whom your customers are and what you can do to serve them. It really does not matter what your competition is doing, it only matters how well you serve the customers you have and can you profitably provide the same value to others in the industry. Do you see how powerful that is?

In the next lesson, I will teach you how to tell if your customers are making you more successful. Did you know some customers actually hurt business? Your employees may even be harboring them among profitable accounts because they do not understand the harm they really bring. You will learn several strategies for freeing up time to spend with the moneymakers all in next week's lesson.

Warmly and sincerely,

Justin Hitt
Strategic Relations Consultant, Author & Speaker

Ps. Send you customer profitability concerns to concerns-profitable-customersat -- if your story is included any of my upcoming report on the same topic, I will send you a copy . (Over a $47 value)

A Profitable Customer is a Matter of Measure

By Justin Hitt, Strategic Relations Consultant,

In targeting profitable customers, your measures of profitability are just as important as the value of the customers it finds. In order to target the best customers for your business, you will need to tune your profit measures according to the unique characteristics of your organization. If you choose the wrong criteria, you could spend money in places that provide little or financial return.

Your Measures of Customer Profitability Are Unique

Customer profitability is measured differently from company to company. This occurs mainly because of internal structural differences between organization, like overhead, product focus, and available resources. A customer who generates high profits for your competition may not be a suitable customer for your company.

Companies are different -- even when their products may be very similar. The proprietary nature of an organization makes some customers more profitable than others; never assume that since your competitor has them, you need them too. Overhead rates differ, along with emphasis, and company focus; many elements contribute to the earnings received from an individual customer. Again, do not assume your competitor's best customers are going to be your best customers.

It is important to choose the right measures of profitability for your company. You can take advantage of your unique strengths by determining what makes a good customer for you. When you are able to differentiate your company from the competition you clarify your position to the customers you target, helping them decide who they should do business.

When you measure anything, looking at the right characteristics is essential to reaching your desired results. If you are not using the right measures, it is like calculating an objects weight to determine its color. If you want to achieve anything, you need to have a clear correlation between the factors you measure and the results you desire.

Using the Right Measures for Results

When you consider the wrong measures, you invest in the wrong type of customer Even if you convert them to a sale, the still would not maximize the return per dollar invested. Plus, building buying relationships can be very expensive, incorrect assumptions about the future value of a customer is sure to lead to poor performance -- maybe even customers that are inherently not satisfied with your products. The wrong customer even affects the feedback you get for product development as well as the long-term stability of your company.

To find the right measures, identify those characteristics that contribute to profits. These elements will most likely be independent of the customers themselves. Simple measures are the dollar volume purchased, time spent presale, and how long does the average customer continue to buy. If you have factors pertaining to labor costs per hour of service, costs of goods and overhead calculations they would be considered as well.

You can find more about these measures through out the parts of your organization that interact with customers. As you gather more information, you will be able to develop a profile representing your most profitable customers.

Bring together the names of customers who represent the top 20% of each list, sorted in descending order by value to your company's sales.

The customers who are common to all lists serve as the basis for researching the initial profitable customer measures. Unfortunately many companies stop here, one might think these customers represent your most profitable. However, these measures only present a sampling of customers but not necessarily those most profitable to your business.

Use this sample to develop questions that help you understand customer needs, wants, and desires, as they pertain to the products you provide. Survey your entire customer base documenting your results for the next exercise. This customer prospective will be invaluable to test your initial targeting profile as you implement these strategies.

Knowing Customer Expectations Improves Accuracy

You are finally ready to compare feedback against Recency, Frequency, and Monetary (RFM) measures to segment your existing customers. If your customer perspective questions were valid (representative of contributing factors to profitability), you should see grouping of similar responses per quintile of top RFM measures. Each range should have similar wants, needs, and desires. If not, survey your customers again with new questions until you get some identifiable expectations among profit measures.

Once you have identified customer characteristics per quintile of RFM leaders, you are ready to work in those factors previously identified, which contribute to profits. When you can match these measures to statistical information about your top RFM customers, you will be able to test profitable measures. You will not know you have the right measures unless you can test them, but now you have valid information to generate accurate tests.

You can minimize the risk of choosing the wrong measures, and improve the accuracy of you analytical measures by:

When you know customers expectation and have some measurable factors influencing the profits generated by them, you can implement a profitability strategy with success.

Take Action towards Profitability

If you do anything, survey the customers you have to develop an idea of their expectations of what you learn against basic profitability measures, and then do what your most profitable customers expect. Repeat the process every 3 to 6 months noting any improvements and what was done to achieve them.

With a clear understanding of the true measures of customer profitability for your company, you can easily focus efforts on those most likely to build your business. Use the wrong measures and you are wasting your time. What criteria do you use to measure your profitable customers?

© 2002-2010 Strategic Relations Journal, 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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