After taking her morning coffee to her desk, Jessica sat down at her computer to look at her monthly financial statements. How could her business be losing money again? She had some great customers. On the other hand, she remembered a call last night with Tim, a real problem customer. Tim was a drain on her time and resources and he didn’t even pay her very much. Yet she also remembered the update last week from Darin, one of her favorite customers that wasn’t very big right now but on the cusp of increasing his spend with Jessica’s firm. She puzzled that there must be a more data-driven approach to understanding her customers and how they affected her company’s financials.
In your own business have you ever felt like Jessica?
When trying to understand how your customers are performing, we’ve found the ABC Customer Classification framework to be very useful.
Graphic Source: Cleverism.com
A class customers represent the most valuable customers you have.
B class customers are the middle tier. Some of these may have great potential and just need to be upsold into class A. Others may be spending a lot of money with you but are not very profitable.
C class customers are those you are losing money on.
As you segment your customers, you will probably find the 80 / 20 rule (also known as the Pareto Principle) applies here. The 20% of customers in class A are likely responsible for 80% of your revenue or profit.
As you quickly realize, ABC Customer Classification requires critical thinking. How do you define A, B, C? Is it just profitability? Does revenue matter? What about small but profitable? What about big clients requiring a ton of work but limited margins?
The simple ABC classification is limited. Where do you draw the dividing line between customers? What corrective action do you take? Just identifying a B client gives you no insight into how to fix the problem.
To address these concerns, we’ve come up with a more robust ABC Customer Classification for account management. Take a look at this 2 x 2 matrix we created:
The X axis can be Revenue or Sales.
The Y axis can be Contribution Margin % or Profit Margin %.
Step 1 is to plot your customers in this matrix. As you will notice, this still ends up in an ABC classification system, only now you have 2 B categories (Yellow) plus A (Green) and C (Red) categories. The B’s have 2 paths to become A’s.
Step 2 is to create account management priorities based on this data.
Step 3 is to establish a strategic plan for customers at each priority level. Your action items may vary depending on your circumstances but below are some general guidelines.
Customers in the upper right you want to keep and increase loyalty. Customers in the upper left you will want to grow and cross sell. Customers in the bottom left need to be cleaned up or cleared out. Customers in the bottom right need improvement.
Client Case Study — IT Services Provider
We recently performed this analysis for a client of ours. We took all of their customers that had at least some current revenue activity. We looked at various categories (Products Purchased, Total Revenue, Lifetime value of the customer) and classified each customer into Green, Yellow, or Red based on certain financial thresholds. As our client discovered:
“This analysis had a positive impact on our whole team.”
It gave their Sales team clear targets to focus on. It showed the Customer Service team which customers should be given the highest priority. It also gave a “why” to their Customer Service team for the direction they received on how to treat Green, Yellow, or Red customers. This system also gave opportunities to upsell existing customers to higher tiers.
As the client noted, “If we lost a Red client, we would still be fine. We are focused on Greens and then do what we can to focus on Yellows and turn them into Greens.” The results of this analysis was simple enough for the whole team to follow quickly and the action items were implemented by front-line employees with little training.
This customer analysis is highly valuable and should be performed at least annually. It should also assist you in driving profitability in your business. CoEfficient Services and our partners can help. Give us a call 877-292-9684 ext. 801 or email jehlers at coefficientservices.com