July 2003
MARKETING ANGEL ™
Separating Angels from Demons
Copyright © 2003 Blethen Maine Newspapers Inc.
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I launched my business with no money and no customers. In my basement. Not a pretty way to do it. I knocked on the entrepreneurs' club door with little more than scads of enthusiasm and a bit of brain power to back it up. Discriminating between good and bad customers wasn't even a concept I thought about — Hey, all customers are good customers, right?
Not so. In the past six years I've abided my share of fiendish clients — those who were exceedingly demanding, changed priorities on the fly or, my favorite, paid late or not at all. Simply put, the cost to serve this set far outweighs economic gain.
Suspect you've got a few wormy apples in the customer barrel? There's a new book for you: "Angel Customers & Demon Customers: Discover Which is Which and Turbo-Charge Your Stock" (Portfolio, 2003), by Larry Selden and Geoffrey Colvin. Colvin, Fortune magazine's editor at large and co-anchor of Wall Street Week with Fortune on PBS, educated me on how a small business can evaluate which of its customers are profitable and those that are a drag on its bottom line.
Marketing Angel: For many small-business owners, the idea that not all customers are worthwhile is radical. How can a small-biz owner get her arms around the concept that some customers just aren't worth keeping?
Geoffrey Colvin: We believe strongly that most customers are worth keeping. The critical understanding most business people lack is how much money they make or lose with each customer. It's incredible, but the great majority of companies don't have the slightest idea. The vital first step is to figure these numbers, making sure you account for all the costs in the business, including the capital costs. In our book, we describe in detail how to do this.
The great news for small businesses is that they can do this today. For giant companies with millions of customers, the necessary software for this job just wasn't available until two or three years ago. But the only thing holding back small companies is mindset.
Brace yourself for a shock: In our experience across a wide range of industries, companies typically find that the best 20 percent of their customers account for 150 percent of total profits! The worst 20 percent typically lose money equal to 75 percent of profits, while the remaining 60 percent of customers account for the rest. Knowing which customers are angels and which are demons presents an enormous opportunity.
Once you know the true profitability of your customers, you can figure out the reasons behind the numbers. For your unprofitable customers, you'll have to face the reality that you're not offering them a compelling value proposition — a way of meeting their needs so well that they'll reward you with handsome profitability. You'll have to devise new, better, value propositions for them, which our experience shows you can probably do. As a result, you'll start to turn those unprofitable customers into profitable ones, which typically creates a substantial swing in the business's overall profitability. In the end, you may find that a small percentage of customers just cannot be made profitable. By the time you've figured out who they are, you'll understand very well why they probably aren't worth keeping.
Marketing Angel: How can a small company adapt its marketing efforts to attract more "angel" customers in the first place?
Geoffrey Colvin: The key is understanding who the angel customers — the most profitable ones — really are. When we ask managers to name their company's most and least profitable customers, the answers we hear almost always turn out to be wrong. Business people often think their biggest customers are their best, but the biggest customers often negotiate the deepest price discounts and require the most time and attention from managers and sales people, which can seriously reduce or even wipe out their profitability. Business people in some industries also tend to ignore the capital costs associated with various customers, perhaps in the form of special inventories that must be held, or slow payment. These costs can turn supposedly profitable customers into money losers.
Once a company knows who its true angels are, it's in a position to redirect its marketing. The change can be quite significant. Since most companies don't know who their angels are, they typically misdirect their marketing, paying insufficient attention to prospect with the most promise of becoming angels while wasting money going after prospects with little promise.
Marketing Angel: What are a few practical ways a small biz can show its angel customers the love?
Geoffrey Colvin: The possibilities are greater than you may imagine. Once you find just how profitable your angels are, you realize you can afford to treat them very specially indeed. A restaurant owner could call her best customers to tell them when their favorite seasonal foods have arrived, or buy special wines for them, or create special menus. A dry cleaner could offer on-demand pick-up, drop-off, and expedited service. The best bank customers are so profitable that a banker might be tempted to bring coffee and doughnuts to their house every morning. It would certainly be justified — yet how often does anything like it actually happen?
The larger point is that most business people need to think creatively about how they treat their most profitable customers. It's surprisingly easy, once you know who they really are and how much profit they actually bring in.
Marketing Angel: How can a company break up with a "demon" customer?
Geoffrey Colvin: It depends on the business. If you've decided there's really no hope of making a certain customer profitable — a decision we recommend you ponder long and hard — a number of options are available. In a business-to-business setting you can explain to the customer that the relationship simply doesn't make economic sense for you. That's speaking a language the customer can understand. By the way, we've heard of cases in which such customers later come back on terms that make them profitable.
In some businesses, such as financial services or wireless phone service, companies have dropped unprofitable accounts by sending the customer a letter ending the relationship. In those businesses it's quite simple.
Retailing is another matter. You can't post a bouncer at the door to keep unprofitable customers out of your store. But once you know the traits of unprofitable customers, you can at least stop promoting to them.
Marketing Angel: What are some of the tell-tale signs of angel and demon customers?
Geoffrey Colvin: We recommend you carry out a real analysis of customer profitability rather than try to guess about who's profitable and who isn't. Still, we can tell you from experience that the most common causes of customer unprofitability are:
- Buying unprofitable "baskets" of products. Of course, to spot this you must first know your true product profitability, which many companies don't — another topic treated fully in our book
- High-cost behavior, such as making lots of returns or occupying salespeople, managers, or phone reps for long periods of time <
- Tying up large amounts of capital, perhaps by paying late.
Marketing Angel: How can a small biz use the principles in your book to increase profit margins?
Geoffrey Colvin: The principles hold huge opportunities for small businesses because you can implement them so much more easily than big companies can. Once you've figured out your true customer profitability, using the process we describe, you'll want to think deeply about value propositions — the ones you're currently offering customers, the ones your competitors are offering, and the new ones you can offer that will meet customers' needs much better.
We can promise you that you'll think about your business in a completely different way. The result, based on our experience, is that your customers will be much happier, your employees will be much happier, and your business will be far more profitable.
Kimberly L. McCall (a.k.a. Marketing Angel™), is president of McCall Media & Marketing, Inc., a business communications and writing company in Freeport, Maine. McCall writes the monthly Sales Force column for Entrepreneur magazine and contributes to inc.com and The Wall Street Journal’s StartupJournal.com. Sign up for her free weekly bulletin at www.MarketingAngel.com or contact McCall at 207-865-0055.