Customer Economics

This report will help companies identify what is the proper sales structure to help identify the most effecient way to support new business and existing accounts while simultaneously reducing costs.  One of their suggestions?  Understand the customer portfolio.   Portfolio doesn’t imply, but explicitly states understanding the economic profile of each customer.

“To gain a deep understanding of the needs and economic value of customers,
companies must analyze the size, service costs, and true profitability of deals, not just their gross margins.”

“Profiling” is hot topic these days in the general political scene, but when it comes to running a company, it is not taboo.  Properly profiling and discriminating customers is OK, especially if you want to get more money from the ones that will affect the top line.  Enjoy.

Well, a fairly dramatic statement, indeed. But not all customer revenue can have a positive effect on your company’s bottom line. Some clients, well, are downright unprofitable. The psychology of sales people, being internal optimists, is hope. Hope that they will give you more money to offset the massive acquisition costs; hope that they recommend you to another prospect; hope they become great references. The last time we checked, hope can’t clear a bank account. It is worth nothing, and having an unprofitable customer being supported by help desk, key account sales force, accounting, etc. is a more of a liability than you may think. Let’s walk through an example of a basic, new business prospect qualification scenario.

The fundamental evaluation of any new business opportunity, especially for a B2B direct sales model is the BANT model – Budget, Authority, Need and Timing. There a dozens of variations off this theme, from Sirius Decision to salesforce.com. But the fundamental model of BANT should come no surprise to any sales manager or for the guy in the trenches. Win on all 4 of these pistons, and the deal is sealed. Knowing how much time and effort it takes for a sales person to first get the suspect, then the prospect to ultimately reach the pinnacle of this scorecard can take dozens, if not hundreds, of man hours. Add it up. Let’s say there are a few staffers required to channel the suspect through the process, from in-house lead qualification to inside sales qualifiers who then pass it off the field sales representative. So, that’s three people all at various compensation schemes. Let’s do some simple math to illustrated a what if scenario (and by the way, this does not account for the marketing dollars spent to get the suspect to show up at the front stoop (you can read about Total Cost of Acquisition in another blog post):

Prospect A:

Step 1:

Lead Qualifier: 1 hour phone call, and 1 more minutes to send “more information” – these prospects usually are classified as “seemore”. They always want more information to help them justify their next move. Add 10 more minutes to put information into CRM or a marketing database. The Lead Qualifier notices the same prospect decided to join a recent webinar posting, download a demo and one white paper. Not much to do here because the in-house marketing database works so well, it automatically tracks the user’s behavior and adds information into the unique ID of the prospect.

Hourly cost, including benefits, direct costs: estimated $100 dollars

Step 2:

In-house sales rep: tries 6 times to get the prospect on the phone through a variety of means, writing emails and voicemails, sends a personal note, a timely article and finally gets to spend 1 hour doing a deeper dive Web Ex presentation. After 2 months of chasing the suspect, the in-house sales rep eventually marks the opportunity as Level 2 prospect.

Hourly cost, including benefits, direct costs: $400 dollars

Step 3:

Just a mere 3 more phases to go before they become a Level 5 prospect, when there is a contract issued and much anticipation for a purchase order. Whew, the boulder is finally moving uphill. So the appointment is made, the sales rep flys out and does the dog and pony. Works the room at and after the meeting, spends exorbitant amount of time building presentation decks, internal IT for proof of concept model, plus using internal finance and legal support to review T&Cs, so on and so on. Chalk this up as great sales day and let the bell ring.

Hourly cost, including benefits, direct costs: $5000 dollars

T&E cost: $600

Estimated Total Cost for Sales Process (not including marketing support): $6,100.

Year One Contract amount: $30,000.

Job well done, right? Well you don’t know yet. While one would immediately think the cost of sale is about 20% of the revenue and that may be a fair assessment at face value. But the more important questions is if this customer actually going to drive the proper profitability for your company long term.

How do you know they will be a likely profitable customer before you expend all this company? It is quite simple. Evaluate your existing base of customers, identify which ones impact the most profitability, get a 360 view of them, and overlay that with your prospecting database. Pursue only the prospects that the same archetype and profile of your best customer. Forget the rest. A tough pill to swallow in a down economy, but only the ones with strong intestinal fortitude can say no to revenue at their door step.

How do you know if the prospect you are chasing is worth the race? Is it the total revenue potential long-term? Is it the quick revenue burst to offset a big bogie number? Is that they may be a loss leader know but has the chance to be an elephant later? There are literally dozens of excuses to try and convert the sale. But there should only be one fundamental metric to use – customer profitability. The smarter question in the beginning is if this customer will make a positive impact on your bottom line? The mystery is how a company knows if they will be profitable or not while the prospect has yet to convert to a revenue generating customer. Unless one has a magic ball, it is almost impossible to know. Let’s face, it. This has been puzzling sales managers and executives for years (then again they get compensated on revenue and/or units sold, not whether they will be profitable or not). Demystifying the question: It answer is quite simple. Evaluate your existing base of customers, identify which ones positively impact the profitability, get a 360 view of them, and overlay that with your prospecting database. This is called predictability. And while it may not be 100% accurate all the time, it is most likely the smartest, most effective way to know the trend. If the prospect has the same archetype and profile of your best customer, then your fruit is probably healthy. If not, you run the risk of getting a bad apple. Why spend company resources to try and convert a customer that will adversely affect the bottom line? Now that would bite.

Does the answer sound simple? It is in theory, but in practice, most companies don’t strategies surrounding Customer Economics. A bit scary, indeed. Unless you have the proper customer data, getting to the answer could be challenging indeed or worse, impossible. Customer data usually sits right in your financial system – who, when, how much, and what they purchased. And if they continue to buy more and more, that information sits in there too. It doesn’t take a brain surgeon to start to build out a model that can start to track conversion, profitability, churn, attrition, value and a host of other segmentations. Customer Economics is currently one of the single most important measurements of success today. Points of view on how issues facing marketing people, how to get started, or the value of such from a shareholders perspective are starting to get the attention of senior executives. We suggest getting your best practices started today. You never know if the Board of Directors, or even the Government (yikes!) starts making this part of the compliance process.