Teaching the ABCs of Business
Guide: Growing Profits Using ABC Customer
By John D. Collins
Most business owners treat all customers the same. However customers don't treat them the same. Customer profiling allows a
business owner to study each customer closely and to group them by common criteria and then to further study each group to identify
their special needs or demands. Sales resources and tactics can then be customized to meet the needs of each customer group.
Aligning resources this way will allow your business to be more efficient and profitable. The immediate challenge to increasing
profits becomes identifying those customers that are most profitable and finding more like them.
From a sales management perspective,
customer profiling allows the business to target a group of customers with a common characteristic, say level of profitability.
Instead of treating each customer the same you're acknowledging that there are needs for various groups of your customers. This
allows you address these needs more effectively and efficiently in an effort to obtain more profitable sales from them.
To demonstrate customer profiling, let's group our current customers by profitability. Let's put them into three levels of profitability
and call these groups A, B and C. For purposes of our discussion let's also say that our budget or profit plan for the next
fiscal year is been completed and the net profit target is 6%. Note: gross profit levels may also be used.
Group A will be our
first group or our most profitable customers. These meet or beat the 6% net profitability target set by our profit plan.
If we sell more to Group A, our profitability will increase rapidly. The quickest results in increasing profitability will be with
growing sales to this group. These should be studied closely in an attempt to identify criteria that will help you to find more
like them. This group should be the first priority of attack by your sales resources. Likely this group appreciates your
business for the value that you deliver with your goods and services. Developing long-term relationships with these customers and
finding more like them will be most beneficial.
Group B are customers whose profitability will range from barely under our 6% net profit
target to just above breakeven. Selling to this group will be profitable, but unless sales volumes are significant, will
not impact the overall profitability of your business as much as increasing sales to Group A. After doing all you can to grow sales
with Group A, then you can direct your sales effort to increase sales with customers in Group B. You can also work to reeducate customers
in Group B as to the value you deliver and eventually transition them to higher prices and membership in Group A. Your sales
staff should delivery value as they educate these customers about the value of your company’s goods and services.
Group C customers
are at or below breakeven costs (direct costs plus overhead) and actually cost you money to serve. Sales to these customers result
in net profit of zero or less. Increasing sales this group is cause for an early exit for your business. A customer in
this category that is a significant portion of your sales and is high maintenance is problematic to your profitability. Sales should
not be increased to this group as this digs a deeper hole. Should a C customer demand and get a significant portion of your
attention and resources, these resources cannot be directed to finding and serving your more profitable customers. You become
a slave to this type of customer and actually have to generate more profitable sales in order to serve them. To increase your
profitability you need to replace C customers with A's and B's. You may be able to reeducate or rehabilitate members of this
group into Bs or maybe even to As. Another idea is to have the decision makers in your organization, responsible for controlling
production costs, try to reduce direct costs especially associated with producing products or services for your C customers.
owners are distracted from profitability because of the demands placed on them by demanding and unprofitable customers. To increase
profitability an owner needs to identify customers that are the most profitable and find more like them. In today's sales climate
to the efforts of your sales resources to meet more specific goals with rifle shots rather than randomly seeking sales with a shot
gun. What are you doing to focus on profit?
Summary Note: This guide describes the concept of customer profiling and demonstrates
how it can be used to more purposely focus the efforts of your sales resources to increase profitability.
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