Identifying your profitable B2B customers


You may be familiar with the famous management novel ‘The Goal’ by Eli Goldratt. The main character, Alex Rogo, struggles to answer the vital question: “What is the goal of an organisation?” Set in a manufacturing company in Middle America, the story follows Alex on his journey to his eureka moment when he declares: “The goal of an organisation is to make money and everything else that we do is a means to achieve the goal.” 

Recently business leaders have had to question this modus operandi as we live in an increasingly customer centric world where customers expect to engage with companies across every channel of service–anytime, anywhere. An example of how things might have changed for organisations was highlighted at the 2015 Festival of Marketing. Keynote speaker Anthony Thompson, from Atom Bank, performed an informal survey of the attendees and posed the question: “Why are you in business – to make money or to make customers happy?” Those who voted for “making money” were simply dismissed as wrong!

Know Your True Sources of Profit

So, who is right Anthony or Eli? Should we always put customer satisfaction ahead of profits? Should businesses aim to make all their customers happy all the time? Or should we find out which customers are worth making delighted and which ones are not? 
However what needs to be recognised is the risk in that if you always put all your customers first, the bad ones may put you out of business or, at best, detract from your quest to provide customer service excellence to the good ones. Looking at it like this, the problem is clear cut: a business needs to know which customers to treat like kings and which can be moved onto competitors. 

Good and Bad Customers: Big is Not Always Best

There are numerous factors which determine whether a customer is “good” for you and your business. Firstly, just because a company is big, with a prestigious brand, and is perhaps your highest spending customer, this does not necessarily make them your best customer. They may demand a director level point of contact and soak up management time. They may have negotiated a zero carriage fee or have multiple daily split deliveries and constantly call your customer service department. They may be argumentative and throw their weight around, disputing invoices and creating a higher than average returns rate.

Laterly, perceived best practice has always been that we should put the customer first and give them whatever service they demand. However, perhaps we should question the profitability of this customer rather than relying on their perceived value for case study material, or their contribution to a manufacturer’s rebate.

Some people would declare that this needs to take into account the “customer life time value.” However organisations should also look at profitability over a suitable period of time. If it’s going to take ten years for the relationship to deliver on profitability then perhaps we are deluding ourselves.

Others would argue that it costs five times more to acquire a new customer than to retain an existing one and, once they are contributing to revenue, they should do what they can to keep them, at any cost. According to Keiningham, Vavra, Aksoy, and Wallard this is myth number eight described in their book, Loyalty Myths. The authors argue that any retention strategy based in whole upon this myth is a recipe for financial disappointment.
Perhaps what is important is to look at each customer or customer segment in isolation and check that if bad customers are being over-serviced to the detriment of your good customers.

The Solution? Identify the Real Costs of Customer Service 

The ideal situation is to have profit and loss representation at the specific customer or customer segment level so that we can analyse the contribution each group makes towards the success of the business. The purists would advocate Activity Based Costing (ABC). This traces the consumption of all an organisation’s resource expenses through to products, sales channels and most importantly to customer segments. Gary Cokins’ article Measuring and Managing Customer Profitability provides a thorough analysis of these issues. 

 However, for many organisations all the costs are not recorded in the enterprise system or resources are not available for the level of detailed analysis required for ABC. So let’s look at getting as much bang for our data buck (out of the information nearly all organisations have or should have). All companies’ measure the basics – order value per customer each day/week/month/year, which specific products customers buy and the cost of that product to the business. We find that most companies tend to stop there. They don’t factor in the cost of sales, cost of returns, and service costs etc. These costs are often taken as overheads to the business and attributed evenly across the customer base. This can give a false impression of which customers are profitable.

Defining which customers are good or bad for your business can have a major impact on your business strategy and ultimately your profits. It’s just a case of finding the right information and then deciding what actions to take to make that step up in profits. But just for the avoidance of doubt, the ultimate goal of any business is to make money, and that should be your reality check when planning and developing your customer service strategy.