Customer Economics

Any smart CEO will say they make informed decisions based on fact, past experience and counsel form his peers. But if information is the currency of business, CEOs have limited or no access to the some of the most strategic required – the economic profile of their customers. The weekly schedule is set, daily meeting agendas are agreed upon, travel plans are booked. Ahhh, everything is going swimming well with time management. The sales forecast is in, operations brief has been supplied, the board meeting presentation is complete. Boy you are on a roll. You lost some customers, you gained some customers. No biggie, “customers happen”. As long as the new customer revenue is at or above the old, you should be covered right? Wrong.

Not all customers provide the same level of profitability to your bottom line. Measured just by quantity of total number acquired, or by the variance of new revenue is a flawed model. Organizations today have little or no insight into the economic profile of each and every customer. Because they are not all created equal, at least in terms of the impact they have on your company’s profitability.

Let’s take a few examples to illustrate the situation:

Tom buys flowers 1 time a year, and pays $120. Tom’s wife, Mary buys flowers every month and pays $10 a month. Each go to the same store (or e-store). Which customer is more profitable?

What if Tom no longer bought from the store, but along comes a brand new customer, Suzie, who also spends $10 a month? Is the company better or worse without Tom and now with Suzie? From a CEO’s perspective he/she may look at the sales reports, and sees the company still has 2 customers. And after reviewing the finance report, you actually increased your revenue. But what he/she doesn’t see is unfortunately the company is losing money on these two customers. They have spent as much time getting Mary to show up and buy once a month, and because their CRM system can’t identify Tom’s economic profile as the more profitable customer, spend less time trying to up-sell him. The cost to acquire Mary’s business is far greater as she continually received emails, catalogues, special discounts, thus even reducing the profit margins more as the cost of sales and marketing are higher as they are centered on Mary. What if the store reached out to Tom during some key seasonal peak seasons or special events, say Mother’s Day, or Birthday. What if they determined that Tom only goes to this store at Valentines but shops at others for other occasions? Thus, Tom, being most profitable customer is most likely not you’re your best customer because is also the most likely to leave the brand. Why? He is being recruited by others, has the money and means to do so, and he has a frequency of 1, thus little or no loyalty to the brand. But it is up to you to make him your best customer because he has the propensity to spend more.

Suzie just adds issues to what most companies do not realize. 80% of a company’s unprofitable customers usually come from the bottom 20%, relative to their peers, thus she is just costing the company more money.

With Customer-Driven Performance Management, you can build the economic profile of each and every customer, thereby having your company understand where to apply your most precious resources. We suggest you ask your finance department if they are in fact about to give you the information that’s worth money.