Ranking your Customers Maximizes Profits

Are all your customers equally valuable to you? How about prospective customers?
If you answered “no” (and I hope you did), do you have a system in place for rating the value of your customers?

No matter how big your company is, your sales and marketing resources (be they salespeople or advertising spending) are limited. So it makes sense to apply these resources to the customers who are most likely to buy your product at a profitable price. Are you with me so far?

Whether you call them A-B-C customers or level 1-2-3 customers, or gold-silver-bronze customers, customers should be ranked in importance. Pareto’s Rule suggests that 80% of your profit will come from 20% of your customers. The remaining 80% of your customers are either relatively profit neutral, or are actually costing you money (in another application of Pareto’s Rule, the worst 20% of your customers are probably responsible for 80% of your costs).

Ranking your current customers also creates a valuable spinoff—the ability to rank prospective customers. If you create a profile of your most profitable customers, you can then look for prospects that match that profile. The factors in the profile will differ by business. But by prioritizing prospects using their similarity to the different profiles in your customer ranking system, you can greatly increase the effectiveness of your customer acquisition efforts. Your business development people can concentrate on the prospects matching the profile of your most profitable clients, and consciously avoid wasting time on the prospects matching the profile of your least profitable clients.

It is relatively easy to rank customers based on either relative or absolute profitability—your accounting department can supply you with the necessary information. But a good ranking system goes further, and requires art as well as science. I’ll illustrate with just two of the many factors you may want to consider:

First, let me suggest the importance of potential. If two retail customers generate an equal amount of profit, but one is a 55 year old factory worker, and the other is a 28 year old neurosurgery intern, which of them is the better customer? If you have 10 products in your industrial portfolio, and two companies are spending the same amount with you, is your better customer the company currently buying two of your products, or the company buying 9 of your products? [Answers: the neurosurgery intern, because of their future buying power, and the company currently buying two products, because of the additional cross-selling potential]

Second, let me suggest the importance of understanding relationships between your customers. A bank was culling its “unprofitable” customers, and cancelled the checking account of a college student who overdrew his account. This action enraged the student’s father, who had a highly profitable multi-million dollar business loan with the bank. He subsequently withdrew his business, costing the bank a considerable amount of money.

If you think customer ranking sounds too difficult, you’re wrong. One simple way to create a ranking system is to assemble a cross-departmental team of salespeople, accountants, operation folks, and marketers. Then have them create a list of variables that you want included in your system—revenue, profit percentage, potential, number of products purchased, volume of products purchased, length of time they’ve been a customer, etc.

Finally, have them assign a number of points to for each factor—for example: 3 points if they’ve been a customer over five years, two if they’ve been a customer over two years, and 1 if they’ve been a customer for more than one year.

Remember—a simple ranking system is better than no system at all. You can always refine your system in the future.