What are the steps needed to determine a customer’s true value? How does a company distinguish between valuable customers, opportunistic customers and ones that are too costly to service? Is this decision based on the amount the customer spends, the products they buy, how fast they pay their invoices, or how often they consume inventory? Well, when it comes to B2B customer management, each of these criteria plays a role in determining whether that customer is too costly to service, whether they should only be viewed as an opportunistic sale, or whether they are the kind of customer the company should build its business around. The idea is to grade each of these criteria in order to provide a weighted average score, a score that helps to distinguish the customer's true value.
Understanding Your Customer's Unique Value to Your Enterprise
I briefly touched on assessing a customer’s true value in Customer Management: The 6 Steps to Asset Classification. Unfortunately, I didn’t really address why most companies immediately think that their biggest customers are their most important, or that those customers who spend the most should be valued the most. For instance, what if those customers take too long to pay their invoices? What if they continually leave the company holding inventory it can’t sell and what if they occupy too much of the sales & customer service department’s time? How valuable are they then? Rarely do companies take the time to consider these criteria. Rarely do they enact strategies to track their impact on the company's cost of capital, its profit and ultimately, its bottom line.
Most companies rationalize these issues and chalk them up to the costs of servicing important customers. They value the gross profit generated on the customer’s account far too much to take an honest look at how much it costs them to service these customers. Therefore, to clear the air, and provide you with the impetus to properly assess operational drain customers versus valuable customers, we’ll review each of these aforementioned criteria and provide a guideline as to how to judge a customer’s worth. Next, we’ll provide a table that grades your customers in terms of their value to your company.
1. How Much Does the Customer Spend?
One of the easiest ways to grade a customer’s value to your business is to set a scale based on the amount they spend with your company. This is the easiest part of this entire exercise and simply involves establishing a scale based on the total sales generated. I’ve included one below and have provided a scale for each and every subsequent step in order to help you determine the true value of a customer.
2. What Kind of Products Does the Customer Buy?
Every company has products that produce more gross profit than others. What products does your company deem to be important versus those products that aren’t as important? This could be based on the amount of gross profit generated on each sales transaction or the product’s strategic importance in terms of protecting your company’s market share. In this second step, we’ll base our grades on the gross profit generated on sales.
3. How Fast Does the Customer Pay their Invoices?
The faster your customer pays their invoice, the less costly it is for your company to service and sell to them. Customers that are prompt payers are much more valuable to your company because they help reduce your cost of money and your company’s financing costs on receivables. There are multiple approaches to getting customers to pay sooner. Discounts, reward and incentives programs are but a few of these. Again, here is a table of the type of grades one might base this third criteria on.
4. Does the Customer Contribute to High Inventory Turnover?
There are essentially two costs to financing a company’s sales. One is the costs to finance receivables and the other is the cost to finance inventory before it’s sold. Selling products with high inventory turnover rates to customers who pay quickly, means these customers are far less expensive to service than those who take too long to pay, and force you to hold inventory. Therefore, this fourth step includes assigning a grade to the types of products the customer purchases. Does the customer purchase products with high turnover rates or low turnover rates?
Grading the Customer’s Value to Your Business
It’s important to note that the higher the total grade, the more valuable the customer is to the company. This means the company must compile grades along each of these four aforementioned criteria in order to determine an overall grade for the customer. The final scale involves assigning a total value to the customer’s account.
- Business build: These customers represent the building blocks for the company and should therefore be its highest priority.
- Core customer: These customers have the potential to become a business build customer and are considered core to the company’s growth.
- Convenient sale: These customers represent a steady source of revenue and provide solid market data on pricing, but they should not be considered a priority.
- Operational drain: These customers continually drain the company’s resources and operations.
An Example of Determining a Customer’s True Value
The following is an example of how a company would go about determining the true value of a customer's account. The following table summarizes the four previously mentioned steps. In this example, the company compiled the customer’s individual grades from each of the four aforementioned criteria. Next, they’ve added up each individual score and determined an average score for the customer. In this case, the customer’s score is 3.75 and the customer is registered as a “core customer” and one with the potential to move to a “business build” status.
When working through these four steps, be sure to measure the customer's true value, or score, over a semi-annual or annual period. Don't limit this analysis to just a single sale or series of sales. Rather, use a long-term assessment of the customer's value to your business.
When it comes to B2B customer management, companies must become aware of the steps needed to determine a customer’s true value. More importantly, the company must ensure that its grading system matches the company’s idea of what constitutes a good customer versus one too difficult to service.
Granted, most customers are known for trying our patience as sales professionals, but there are some that are known for helping us help them. Now, isn’t it important to know which customers these are and how best to win them over? Better yet, isn't it more important that your best customers get your best service, your best product offering and your best pricing? Of course it is. The purpose of this entire exercise is to quantify the value of customer accounts in a way that allows your company to truly asses their importance to your business.
To run your own back-end customer rebate program as described in the above video, please go to: Sample Back-End Rebate Excel Sheet for Customer Retention
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