Tags: Customer value (/tags/customer-value) , Segmentation (/tags/segmentation) ,

Why focusing on your most pro table customers could prove costly
29th Aug 2019

Nicholas Watkis (/pro le/nicholas-watkis)

(/pro le/nicholas-watkis)
Principal Consultant , Contract Marketing Service ,

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It is often said that 80% of an to know your
organisation’s customers
sales come from 20%better. 
of their clients. So should you
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concentrate on the most pro table 20%?
A recent
Enter video
your onaddress
email the Financial
here... Times website was entitled, “Are Pro ts Still a Good Thing? (https://www.youtube.com/watch?
v=PtHgkXkGoTo)” The video was concerned about investment, but it made the point that in some places the pro t motive itself
is under attack for fostering inequality, as well as other reasons more
Sign Up often to do with political correctness than economic reality.
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Businesses exist to make money for the investors, by anticipating and satisfying customer demand. If a business does not make
money it makes a loss. In other words, instead of the business generating income from its customers, the cost of providing the
goods or services comes from the capital of owner investors. The business then fails when it runs out of capital to fund the service
or product. Even so-called “not for pro t” businesses have to make a pro t rather than break even, in order to provide money to
reinvest in the project if it is to be sustainable for the long-term.

For the marketing manager responsible for producing a continuous stream of pro table income for the long-term bene t of the
organisation, balancing the need to make pro table income against the interests of the customer is paramount. Contrary to what
some may believe, customer satisfaction (https://www.mycustomer.com/hr-glossary/csat) is not the main objective of business.
Customer satisfaction is important, but customers can be satis ed by the provision of free goods and services.

Ultimately, it is the customer who has the power, because they have the money. The objective of the marketing manager is to
maximise the level of pro table income for the long term while minimising the use of assets and investment, by managing all
resources e ciently and e ectively.

Pro table income comes from sales to customers. Although responsible for the level of pro table income, marketing managers
are not responsible for the overall pro ts of the business. While marketing managers are responsible for most of the variable
costs of producing income,  xed costs are the responsibility of the nancial o cer and chief executive.
×
Get to know your customers better. 
“ The less pro table 80% ofadvice
Tips and thedirect
customer base also
to your inbox, twice a week. contribute to overall

income
Enter production,
your email address here... so it is important to consider how exactly those
customers contribute to the interests of the business.
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It is generally considered that 80% of an organisation’s sales come from 20% of their clients, thus it is often thought that the
20% of the customer base which provide the most pro table income is the area on which the business should concentrate.
However, the less pro table 80% of the customer base also contribute to overall income production, so it is important to consider
how exactly those customers contribute to the interests of the business before making any decision regarding their future.

Experience shows that it is a simplistic idea that it is better to concentrate time and investment where it already shows more
pro table results, rather than where the results are less pro table. However, increasing investment in such a manner and to
 ignore the less pro table areas without understanding why they are less pro table, can be counterproductive and potentially
expensive.

Before making any decisions that might adversely a ect the customer base, there are a number of questions and actions that
marketing managers should consider:

How many customers are there, that constitute the 20% and the 80% ? It is important to know how many customers there are
and whether or not the customer base is growing, or shrinking?
Where are they? Knowing where customers are geographically located and the potential for growing the customer base in
those areas is important when considering transport and delivery opportunities and costs.
Is the geographical distribution of customers a factor in their lower pro tability? Are there other potential customers in the
vicinity of isolated customers that collectively could be developed to greater pro tability? ×
Get to know your customers better. 
What do these customers buy? How much do they spend? How frequently? This information may enable changes to be made
Tips
to the service which would bene t the and and
client advice directthe
improve to your
level inbox,
of pro twice
tableaincome
week. produced.
Are all customers being o ered the right product mix for them? Would customers bene t from other products or services that
Enter yourbe
could email addresshow
provided - here...
do you know?
What might be done for customers that would encourage them to increase their level of purchase of their existing orders.
Sign
Could their order size be increased with the encouragement of Up
discounts or improved credit facilities as an incentive?
/
 Do all customers meet the company’s trading requirements in size, order size capability, location? Can this be improved by
altering conditions or servicing through other methods?
Are credit terms suitable or would a change improve cash- ow and pro tability?
What are the real reasons behind low pro tability with the customers that comprise the less pro table 80% ?
Could the admin/service costs of the 80% might be reduced without a ecting the customers? Ask the workforce how they
would improve the administration system.

All customers contribute to the size of the business and its overall market share. That size of the organisation a ects its in uence
in the market, which also a ects con dence of potential customers and ultimately their buying decisions.

Allowing the more numerous but less pro table customers to wither by neglect, in order to concentrate investment on the less
numerous but more pro table ones, increases over-reliance on a smaller customer base, which increases an organisation’s
nancial vulnerability. At the same time, concentrating resources on the more pro table customers is likely to result in the law of
diminishing returns, where additional investment may only result in a marginal increase in income, but with reduced
pro tability. Those customers which might be deemed less pro table, may well be considered as opportunities for potential
growth, rather than seen only as sources of cost and low productivity.

Pro ts bene t shareholders, but also provide investment for the business which ensures employment for the workforce on which
the business depends, while enabling the production of products and services on which customers rely. ×
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