When companies set their strategy, the overwhelming focus is often on the top line as a means to drive bottom line growth. Increasing top line growth is often a good strategy. However, in the current labor environment where human resources are constrained, this approach becomes very difficult. Unit output increases can be hard to come by when you can’t find enough workers.
The most significant way for a company to increase its profit growth is to take a hard look at all of its customers to determine which drive profits and which detract from profits. Given our resource-constrained environment, companies that want to grow their bottom line have to do so by focusing their limited resources on their best customers that make the most significant profit contribution.
Related to this issue, we have a few foundational beliefs:
- Increased volume creates more work, but not necessarily more profits.
- The gross profit the company earns is an average across all customers.
- Not all customers are created equal.
Both customer research and my own experience in advising companies suggest that most companies have a concentration of customers (often 20 to 30 percent) that detract from profits. These are the customers that bring the average gross profit down. Given constrained resources, if some or all of these customers are eliminated, gross profit should improve.
When making such a customer assessment, I suggest taking the following steps:
- Develop a profile of your ideal, or “A,” customer. This assessment can include data points such as volume of business, gross profits, pricing, cost to serve, etc. Most companies know what their ideal customer looks like, but not many use the definition as a means to weed out customers that don’t fit.
- Sort your customers into groups based on how closely they match your ideal customer profile.
- Be disciplined in saying no to opportunities or existing customers that don’t fit so that you can focus your capacity and resources on the best and most profitable opportunities.
In my experience, when companies get into detailed data about the economics of their customer relationships, the results are often startling. In most cases, they have more customers than they realize that are detracting from the company’s profits. This is because most companies acquire customers over time without using a clear filter for their ideal customer requirements. Developing the standards around your company’s definition of an “A” customer is the first step, and exercising the discipline to say no is the hard part.
The focus on your best customers is important all the time, but especially in an environment where resources are constrained.
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