The customer is NOT always right -- for you
By Jenny C. McCune • Bankrate.com

Salespeople are adept at pigeonholing prospects: Prospect A is just kicking tires; Prospect B is a long-shot; and Prospect C falls somewhere in between. But what few business operators realize is that they can use this same technique to maximize profits by casting a critical eye over existing customers.

"Whether you're a large or a small business, it makes sense to go through your customer base and purge it of customers who aren't a good match," says Laura Michaud, president of The Michaud Group in Elmhurst, Ill. "Otherwise, you're just wasting your money on mailings and phone calls made to people who are least likely to use your product or service."

Activity-based cost accounting
Companies can assess the true cost and profitability of customers (as well as the good and services they sell) through activity-based cost accounting, says John A. Pearce, a professor of strategic management and entrepreneurship at Villanova University's College of Commerce and Finance. "It's a different way of analyzing the data that you keep in your books," he says.

Activity-based cost accounting is the subject of university courses and seminars, but the idea behind it is simple: By looking closely at the activities that consume resources, you can see which ones cost more. That allows you to control overhead more closely than traditional accounting allows.

The more complex your product line, the more an activity-based analysis can help. It is most helpful when overhead is high and products are diverse in their complexity, volume and amount of labor consumed.

If you or your company's bookkeeper are unfamiliar with activity-based cost accounting and don't have the time to bone up, you can still put the principle to use, Michaud notes. "What you really need to know is how much a customer purchases from you, how many of his referrals turn into customers and how much that brings you," she says. "Subtract from that figure how much it costs to retain that customer."

Most small businesses make the mistake of only looking at how much an account brings in, rather than its true "net" value. "There are many customers who bring in a lot of revenue and aren't expensive to keep, or who don't bring in a lot of revenue, but don't cost a lot to maintain," Michaud says. "But then you have those who bring some revenue, but turn out to be exorbitant in terms of expense."

The idea is to figure out which customers are big moneymakers and which are marginal so that resources can be apportioned accordingly.

Cut deadwood -- or tier your services
Since all customers are not created equal, how should a small business deal with its less profitable customers?

Prune your customer base of deadwood; cut the bottom 10 percent revenue producers, advises Linda A. Swerling, president of Level II Solutions, an international business and operations development firm in Brookline, Mass. That's how she keeps her company fit and trim.

Not everyone agrees that "firing" a customer is a good idea. "You've spent all this time and energy at recruiting a customer," says professor Pearce. "It's masochistic to let them go." Instead, find ways that you can work together profitably, he argues.

One easy way to maximize profits is to offer different levels of products and services. Segment your customer base into different tiers, giving better support and products to those that can afford to pay. For example, Gayle Oliver Hardt, president of Execume, an executive profiling and placement firm, realized that only the highest level executives (vice presidents and the "o's" as in CEO, CFO, COO, CIO) would be willing and able to pay for one-on-one consulting. So she devised other solutions for lower-level executives. She runs seminars, which cost less than her direct consulting.

For those who can't afford a higher level of service, Hardt sells a do-it-yourself book and CD-ROM combination called Execume: It's More Than a Resume, It's a Reflection of You (Empower-U Publishers, $29.95). "It lets me serve the bottom 20 percent of my customer base," she says.

Offer a chance for redemption
Sometimes it's also possible to rehabilitate a customer; that is, to renegotiate terms and turn a 90-pound weakling account into a revenue heavyweight, says Jennifer Johnson, president of Johnson & Co., a Santa Cruz, Calif.-based marketing communications firm. Johnson ran into trouble with a client that was making unreasonable demands. Things came to a head and the customer terminated Johnson & Co. It hired another PR agency, only to come back to Johnson & Co. "At that time we renegotiated a new business relationship that worked for us and for them," Johnson says.

Sometimes, though, the best time to evaluate customers is when they're still prospects. That's the main tack taken by Johnson -- she's choosy about who she signs up as a client, believing that quality (five big revenue producers) is better than quantity (a hundred small clients). It's more efficient and costs less to give superlative service to a chosen few instead of marketing to the masses, she argues.

"It's the old 80/20 rule," Johnson says. "Eighty percent of your revenue comes from 20 percent of your clients, so why not target them? We purposely try to keep our number of clients to a manageable number."

Similarly, turn away prospects that don't fit into your customer's mold. Myra McElhaney, president of McElhaney & Associates, a professional speaker and trainer on customer service, will turn down a project when it's a mismatch of her skills or interests. "I'll just tell them I don't have the resources for this project and give them referrals to other companies that can handle such a large contract," she says. Sure, it's a loss of potential business, but McElhaney believes if it's a poor fit, than she's better off not overextending herself.

It all comes from the old salesperson's trick -- size up the prospects and you may find that your company can do less work and make more money by targeting its most profitable accounts.

Jenny C. McCune is a contributing editor based in Montana
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-- Posted: April 3, 2000