Thursday, May 8, 2008

Learn the Key to Profitability and Longevity

Who are your customers. Really? Obviously, not all customers are equally valuable to you.

Some consumers make product purchases only, thus are essentially transaction-based customers. Others have potential as repeat and loyal customers.
Because you have limited resources to deliver 100 percent satisfaction, you must target customers and focus your products and services wisely. This means scrutinize every aspect of your business, relative to your com petition, to identify your best, most profitable customers.

What does your company do best? Which customers can you serve and delight consistently, over time? Determine what they need and want, then exceed their expectations. Anticipate what they will need and want next. Finally, invest to keep them. You may use criteria such as company size, location, extent and/or level of demand, technical requirements, and potential for long-term purchase or use.

Cost of a customer

Determine the true cost of each type of customer (best, good, weak). You may want to group customers by industry (SIC code), sales volume, company size, geographic location, products purchased, product applications, demand for similar types of technical support and service programs.

In service industries, the cost of business is serving the customer. Peter Drucker describes the calculation of activity-based costing in his article, “Information Tools,” Harvard Business Review, January/February, 1995: “Yield per customer, both the volume of services a customer uses and the mix of those services, determine costs and profitability.”

He further postulates that executives need four kinds of information to make informed judgments:
1) Foundation information (i.e., cash-flow, liquidity projections). These figures can indicate the existence of a problem that requires diagnosis and treatment.
2) Productivity information (value-added analysis, benchmarking). You need data relative to the productivity of all factors of production; total-factor analysis.
3) Competence information (core competencies, special or unique abilities). Every company needs the ability to innovate and change relative to the entire field or industry; to ask innovation questions.
4) Resource-allocation information (scarce resources: capital and performing people convert into action), Ask: what happens if the proposed investment fails to produce the expected results?

If the investment is successful, what will it commit us to? When should we expect what results? Measure the results of capital expenditures against expectations. Allocate human resources thoughtfully. Identify the expectations of senior executives before hire or promotion; appraise performance against expectations.

Know your best Customer profile

Develop a profile of a profitable customer group with common traits, and then prepare a comprehensive list of customers and prospects. Once you build some successful relationships, tailor your products and services to meet the needs of each particular niche — better than your competition.

You may want to experiment with different types of accounts with similar profile characteristic once your defined your market position. Seek more prospects that share common traits and needs with your best customers, then expand into those market niches and tailor products and services to accommodate their unique requirements.

When you understand and solve your customer’s business problems, you deepen the relationship by interacting with them as individuals, in ways that are meaningful to them. Conduct continuous relevant personalized research to discern salient information, then use it wisely for decision-making and to guide your business and marketing strategy.

AT&T, L.L. Bean, Canon, MBNA all excel at using their superior customer databases to interact with their customers as individuals. Every instance of contact with your customer is a point of reckoning, either as delight or disappointment. Make sure you “get it right” at each critical point. Then, eliminate every step and activity within your operation that has no value to your customers.

Customer partnerships really develop after the sale with the consistent delivery of service and value-added benefits, competence, reliability and trustworthiness over time.

Focus your efforts

In their book, “The Discipline of Market Leaders,” Michael Treacy and Fred Wiersema present a powerful case for the efficacy of market leadership through focus and discipline. They cite compelling examples of successful companies that focus “like a laser” on their target customer, achieve and maintain a narrow and unique value, and dominate a specific market niche.

They suggest three customer propositions:
I) operational excellence; low price and hassle-free service (Wal-Mart):
2) product leadership; offer the best product performance and innovation (Intel, Nike); or
3) customer intimacy; the cultivation of customer relationships to satisfy customers’ unique needs with the best solutions and support for optimum results (Airborne Express).

The bottom line is when you understand and solve your customer’s business problems; you deepen the relationship by interacting with them as individuals, in ways that are meaningful to them.

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