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Business Tip of the Month

Business Tip
of the Month
For the month of December 2002

Identify your best customers to increase profits

If your business is like most, you put a lot of effort into attracting new customers. After all, that's an essential part of growing the business. But sometimes it's more productive to step back and review your existing customers, and perhaps even get rid of a few.

You might be surprised at what you find if you take the time to analyze your customers. Start by listing customers in order of sales. Then make your best estimate about the cost of those sales. For example, you might give volume price breaks to your biggest customers that make them less profitable than smaller customers. But don't just look at the cost of sales. Ask your sales staff, your customer service staff, and your accounting staff to assign a simple grade to your customers (e.g., A, B, C, D, or F). This will give you a relative measure of how much time and effort each customer requires.

Once you have profitability and customer care information, you can begin to rank your customers in groups from best to worst. The "best" are easy. They're the customers you should make a special effort to appreciate and retain.

You have several options for the "worst" group. With some customers, you might want to change your pricing structure to charge them for the excessive costs and attention they require. With others, you might want to sit down and address specific problem areas. Sometimes just making customers aware of problems can produce positive joint solutions.

In some cases, the only solution is to part ways. Do this gracefully, without creating unnecessary ill will that can come back to haunt you. If possible, find a plausible business reason to support your action. But if necessary, be blunt and tell the customer that you're cutting back to provide better service to your top customers. Suggest alternative suppliers they might contact to fill their needs.

Eliminating customers may be counter-intuitive, but it can work wonders for your bottom line. Call us if you'd like assistance with the financial analysis of your customers.

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