One of the most important elements of your company’s strategy is deciding what blend of products or services to offer and which customers and markets to focus on. Many companies make a serious mistake by not clearly defining their “A” customers when formulating this strategy.
In their quest for growth, companies often try to be all things to all people, rather than focusing their efforts on specific customer groups. While this strategy may deliver growth, it rarely produces good margins and profits. Why? Costs are based on activities; more sales and customers require greater overheads to support these increased activities. If the margins don’t come along with the growth, profits suffer.
Some of the most profitable companies I work with have very clear parameters for their “A” customers. They consider characteristics such as the customer’s industry and size and they ask themselves these types of qualitative questions:
- Does the customer treat vendors well?
- Are they a price-only buyer or willing to pay for value added; i.e., can we get good margins with them?
- Do they pay on time?
- Do we have a true relationship with them or do they treat us as merely a vendor?
By having a very clear customer selection strategy, companies may sacrifice top line growth but they will generate greater bottom line profits. The way we see it, value is created in a business when the business produces returns (cash flows) above the cost of capital. Sales growth without profits does not create value. The bottom line is what truly matters, and you will increase your bottom line if you have a clear picture of what your "A" customers look like.
Has your company focused on identifying its "A" customers? Share in the comments!