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Measuring the Value of Your Customers

Is the Customer Always Right?
In this era of customer relationship management, the customer seems to be at the center of the universe. Companies who keep a laser-like focus on their customers can more readily respond to their customers’ changing needs, sometimes to the point of anticipating needs before customers even express them. Companies have learned that this practice helps the bottom line. I agree….to a point. I believe that it works both ways, and companies should evaluate whether they go too far with providing whatever the customer wants, whenever they want it. When that happens, it drains resources and the rest of the customer base receives less attention. It may be time to fire a customer. In most customer-centric companies today, this would be regarded as heresy. But the issue needs to be raised and needs to be addressed.

Symptoms
Is your company suffering from bad customer-it is? Let’s take a look at some of the bad customer types that you might encounter.

The Whiner – this customer holds the world record for the number of calls to customer support and tech support. Nothing is ever configured, delivered, or maintained to this customer’s satisfaction. Even if the CEO of your company showed up in person, they still would whine about something.

The Fence-Sitter – this customer cannot make buying decisions without hiring the Rand Corporation. It takes the sales people double the amount of time to convince the customer to buy, even with the second and third sale to the same customer.

The Deadbeat – this customer never pays you on time in accordance with your terms, and sometimes never pays you at all. No matter how many times your accounting people call, it’s one excuse after another. You now have a collection agency and an attorney on call, ready to unleash them on this customer.

The Royal Family – these customers know that they are your primary and most important account, and they never let you forget it. They expect everyone who has an interaction with them on any level to kiss their feet and pay proper respect. If they say they want 10 people onsite instead of the 3 that are in the contract, they expect you to provide them – because they are, in fact, king/queen of your customer base.

Wreaking Havoc on the Bottom Line
Why be so concerned about having a bad customer? Because it takes valuable time and resources that your company may not have, especially in today’s economy. A whiner customer will take up so much of tech support’s time so that your other customers get discouraged, or worse, you can lose your good customers entirely. The fence-sitter lengthens your sales cycles, meaning that revenue takes months longer to come in, a direct impact on the bottom line. No company can afford to have too many deadbeat customers because if you have no cash flow, you can’t pay your employees and suppliers, let alone have any profit after everyone is paid. The royal family’s expectations mean that you could be providing more in resources to that customer than you are receiving in revenue, which could even result in a net loss.

Assessing the Damage
If you suspect one or more of the bad customer types listed above, then it’s time to think about your customer base. Make a list of all the customers you have by market or category, including those that are in the sales cycle. Talk to the employees who interact directly with the customers. These can be sales people, technical support staff, engineering, accounts receivable, or post-sale maintenance staff. Create a “report card” for each customer, noting instances where extra time or money has been spent beyond the norm in order to meet customer’s requests. For each customer on the list, give them a grade. For the top few customers who are the worst, calculate the cost of extra resources, late payments, delays in sales, or missed opportunities. This can be a real eye-opener, especially if you consider how you would use the resources otherwise. You might be able to instead spend the time and money engaging new and more valuable customers. For the worst offenders, it might be time to fire some customers.

Firing a Customer – Never Burn Bridges
Isn’t it tempting sometimes to just lose it when one of your whiner or deadbeat customers is pushing your buttons? Sometimes it’s tempting to just tell them where to go (or where to get off). But, it’s best to do that in the privacy of your home, or in the shower, or in your imagination. It’s a very delicate situation, because something said to a customer in a heated discussion will spread like wildfire throughout the industry. And as they say, you may never work in that industry again!

The best way to handle firing a customer is to wait for a logical point in time when a business activity will be ending, such as the end of a contract or purchase order, or the end of a project, or when you are finally paid for products and services that you sold to them. After that point in time, make sure that employees know the company’s position will be to not do business with those customers in the future. If the customer calls and asks for a sales call or invites the company to bid on an opportunity, you should respectfully (and tactfully) decline. If the customer wants to know the reason, you can always say that you don’t have the resources at this moment, or that it’s not within your company’s strategic direction to pursue the opportunity. It’s purely a business decision. Don’t say any more, and don’t talk about the customer’s track record with anyone else in the industry. Keep it internal, private and confidential within the company.

A Quantitative Tool: the CPV factor
In Chapter 4 of my book, “From Idea to Launch at Internet Speed”, I introduce the concept of Customer’s Profit Value, or CPV. It was presented as a screening criterion to decide whether a new product might attract “profitable” customers. There is actually a formula you can use to give a quantitative measure of a customer’s value to your company. You might want to apply this to potential customers.

There are 3 components to calculating CPV:

CLB equals the typical customer’s likelihood of buying (a percentage)
P equals the estimated price of the product or service
SC equals the cost to sell to a typical customer (based on the sales cycle)
PC equals the post-sale costs to support the product or service

The formula is: CPV = (P-PC) – SC/LCB

The CPV can be viewed as how much that customer will contribute to your company’s profitability.

Quick and Quirky Example
You are a product manager for a small company that manufactures and distributes USB cables. Your customers span several markets: consumer/retail, businesses of all sizes, and the federal government. The company’s sales force has sales reps assigned to the various vertical markets by region. Because of the price competition in the electronics market, the prices of USB cables have dropped considerably, so the sales strategy has been to focus on high-volume accounts. In addition, your CEO’s mandate for the whole company is to reduce expenses because the industry is being squeezed by the price reductions. The CEO has just given you the assignment to prioritize your customer base for the newest version of the product that will be released next month, and also to identify any customers that might need to be fired.

After compiling a list of customers by market and by region, you hold a series of teleconferences with the sales representatives to gather information about the sales cycle and customer buying decisions. The consumer/retail customers seem to be just fine, placing regular orders, with short sales cycles. Half of them are high-volume sales, and the other half is lower-volume. The business-to-business customers are somewhat problematic, with two of the larger companies postponing their buying decisions due to recent dips in the economy. The federal government accounts are all high-volume which is good, but the sales cycle has become even longer than usual, because as the customers say, “It’s an election year, you know!”

Your next meeting is with customer and tech support, and those department managers identified two of the larger business-to-business customers that are causing a lot of problems, but the retail and the government customers are quite reasonable.

Your last meeting is with accounting, and the manager of accounts receivable is eager to have your ear regarding collections for some of the accounts. She identifies one problem customer in the business-to-business area that happens to be the same company causing tech support problems. She also identifies two of the smaller retail customers who are paying 60 days later than normal. But her biggest complaint is the federal government, because they not only pay 90 days after invoice, but often the payments are late as well, creating havoc with not only collections, but also quarterly financial reporting.

So, on your preliminary list you now have two customers for possible firing: one business-to-business customer (tech support and collections issues) and the federal government (sales cycle and collections issues). Now you’re in a quandary, because the CEO’s direction is to go after high volume customers, but also reduce expenses. It’s unlikely that the CEO would want to stop doing business with the federal government entirely. However, it might be possible to reassign some of the sales people in the region to go after high-volume retail and business-to-business accounts instead. Your recommendation to the CEO is as follows:

Priority of accounts (highest to lowest): Consumer/retail large accounts, Business to business large accounts, Federal government

Actions: Fire Business-to-Business Customer “X”. Re-assign sales people in 3 regions who have been selling to the government to instead sell to large accounts in the consumer/retail and business-to-business markets. ------------------------

I hope that all of your customers treat YOU like royalty!

Catherine Kitcho
The Launch Doctor