How to Identify Your Most Profitable Customers

by Andrew Lutts

In a previous blog post, we  discussed the importance of identifying and interacting with your best and most profitable customers. As we mentioned in the previous post—these are not necessarily the customers who spend the most money. The most valuable customers can provide you with ways to build business profits by advocating on your behalf (i.e., referring friends, family and colleagues) and generating more customers.

When it comes to identifying your most profitable customers, Pareto's Principle (also known as the 80–20 Rule) applies. It's referred to as the law of the vital few and suggests that 80% of your profits come from 20% of your customer base. The customers who make up the 20% pay a fair price, pay on time, are loyal, and recognize the value you bring. They're your reasonable customers who aren't expensive to serve. When you satisfy this small segment, they proactively refer others and you reap the benefits. Thus, you'll want to focus on the highest value customers who fit in the smaller group. These are the most important customers—they're high-volume repeat buyers that are receptive to new products and services, and are most likely to advocate on your behalf.

For example, you might find that even though Customer A brought in a large amount of revenue when they first started purchasing from you, the revenue growth has since tailed off. However, Company B, initially a small customer when they first started purchasing from you, might now provide you with solid revenue that adds up over time. Although they both have their worth and their place in your business, knowing how much each customer brings in, helps you plan a targeted retention strategy.

Questions to ask yourself: 

• What is the breakdown of customer profitability segments by channel?
• What are the most profitable customers buying?
• Who are our least profitable customers?
• Which products are most often purchased (of our most profitable products)?
• What services do our most profitable customers use?
• What are the tangible costs of servicing least profitable customers (i.e., taking inordinate amounts of your staff's time, unwarranted credits)?
• What are the intangible costs of servicing least profitable customers (i.e., abusive to support staff and general aggravation)?

If you have a customer management system, look deep into your customer data to determine where your profit comes from (i.e., past purchases to identify demographic trends, consumer spending patterns, buying characteristics, and lifestyle behaviors that are likely to drive your growth). If you cannot identify common patterns that are constantly evolving, you risk allocating resources to customers, offers and issues that may or may not add value—to the customer or your organization.

Of the components that contribute to company profits, three of them reflect customer loyalty: retention (measured in years), advocacy (measured as referrals) and expanding purchasing (measured through increased purchases). Source: BusinessOverBroadway.com

Understand who makes up your profitable 20%. Then develop and execute a targeted email nurturing and retention strategy to increase customer loyalty, decrease turnover, and maintain lasting relationships with them. Ask them how you're doing, and how you can do it better. Offer them something of value. But most important, nurture them and allocate your company's resources accordingly.