It’s not uncommon for business leaders to stress the importance of “customer focus” through all areas of their enterprise. On the surface, not a bad idea. However, upon closer look, this approach may be keeping your business from realizing its full potential. Here’s why.
We’ve all heard of the Pareto Principle, sometimes referred to as the 80-20 rule (you know, 80% of your sales come from 20% of your sales force, 80% of your problems come from 20% of your customers (and your employees), etc. Many have come to accept this premise with a shrug and a kind of “yeah, so?” attitude. We can do better.
Recently, during a strategy session with the senior leadership team of a fast-growing company, we decided to take a closer analysis of their best client relationships. Although the aim of profiling these important accounts was to help identify the best prospects for new business, the team made an important discovery.
We began by breaking all of their active accounts into four quadrants by sales volume. Let’s say they had 500 active customers; that would be client 1-125 in the first quartile, 126-250 in the second quartile, 251-375 in the third and 376-500 in the fourth, again by sales volume.
We then broke down their total annual sales volume by each quartile. Turns out that about 90% of their total annual sales volume is in quadrant 1…90%! This of course means that the remaining 10% of their top line sales were spread among the bottom 3 quadrants (6%, 3% and 1% to be specific). Said another way, half of their customers (250 accounts in this case) contribute 4% of their total sales. It gets better.
Since general overhead is spread across all areas of the business, each quadrant showed the same 25% of cost. Here’s the fun part. When it comes to profit, the top quartile delivers in excess of 100% of the company’s total profit, with the second breaking about even, the third showing a loss and the last a significant loss. What’s going on here?
Two things. First, most modern accounting systems won’t show account dynamics this way. Second and even more impactful may be how we look at customers in general. We instruct our team members to do whatever is necessary to satisfy, please, delight, exceed the expectations of our customers. Which ones? All of them. When? All the time. Therein lies the problem.
While no one advocates being dismissive, or rude to customers, the fact is there is a limit to the level of service we can afford to provide to marginal accounts. Changing how we process business transactions with these customers can, in many cases help us hold on to some (most?) while eliminating the unproductive strain they can put on the business internal processes.
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