directedfocus

It makes a lot of sense to drag out the quantitative methods and dig deep to determine the value of individual customers or customer groups and give perks and privileges to high-value customers.

A company can either try to turn low-value customers into high-value ones, or simply fire them. Nicely or even Donald Trump style, if that befits you.

The numbers prove that low value clients cost more than they’re worth anyway.

I'm a big fan of grouping your customers and knowing what each groups purchases and why. More importantly knowing the profit of each customer group is what you need to know.

Then fire them?

I wouldn't go that far there is a smarter way to do business than that.

Take the accounting practice who did this. They grouped all their clients and in doing so discovered one startlingly interesting thing.

Family groups were king. There may have been a couple of corporate entities which were big earners but there was also the individuals, their family and sometimes cousins and their children.

Firing the individuals because they in isolation weren't all that profitable had greater ramifications that first thought.

What they did was worked out how much each group was bringing in in profit and was there a more efficient way of managing the lower, but still important, profit clients.

In this instance the firm outsourced this client group work to Malaysia, where accountants meet a similar CPA standard and as well operate similar systems.

They maintained their margins and freed up staff time of over $1 million dollars.

Is Pareto's Law a better model?

Yes and no.

If you say that 20% of your clients earn 80% of your income then why not sack the 80% and get more 20% clients.

Firing low-value customers can sound the death knell.

Ah then we should convert the lower payers into higher payers?

That's great in theory but if I'm your competitor watch out ... cos I'm gonna get you.

Trying to turn low-value customers into higher-value ones, results in the same problem.

The key reason: Companies that rid themselves of low-value customers — or take steps to turn low-value customers into high-value ones — leave themselves open to successful poaching by competitors.

If the competition knows that you have fired many or all of your low-value customers, they are likely to intensify their efforts to take them away from you, because they now know that all, or most, of your remaining customers are of the high-value variety.

So what’s the alternative?

Improve the quality of your high-end customers at the same time that you keep your low-end customers, but you should find other, cheaper, ways to manage the low-value customers, such as the accountants did or by offering minimal discounts or other benefits.

You have to keep your competition confused about who your good and bad customers are.

The smart move is to be taking both high and low value clients from them and they won't know or understand how you can do what you are doing?