As a business owner, you know that customers are essential to grow revenue and increase profits. You also know that the best companies are customer-obsessed and provide personalized experiences, quality products, and friendly responsive service.
Knowing your customer metrics is the first step to improving profitability and the value of your business. Specifically, knowing your customer metrics helps you identify areas where you can make changes to improve customer profitability, acquisition, and retention.
Starting with the big picture, it’s best to avoid “high customer concentration,” similar to having all or most of your eggs in one basket. If your company is dependent on only a few customers for the majority of its revenues, develop your marketing and sales plans to increase customer diversity, and drive the value of your business.
Now it’s time to drill down into the details and gather information about your customers. You will need this information before you can begin improving your business.
Mile High Heating and Plumbing, a Colorado-based mechanical construction company, owned by Roy Wilson offers design, engineering, fabrication, and construction capabilities. The company’s expertise includes program development, project estimating, complex systems design, and engineering.
Mile High Heating and Plumbing has five product lines: (1) HVAC and refrigeration, (2) plumbing and piping, (3) equipment repair and retrofit, (4) building automation and controls, and (5) planned maintenance programs.
Commercial customers include the office, medical, retail, and industrial sectors. Approximately 95% of the company’s business is in commercial mechanical contracting. Residential clients comprise the remaining 5%.
Roy is committed to customer service, continual improvement, and quality assurance. Safety and risk management are priorities for the company. Up to this point, most of Roy’s attention was devoted to improving internal operations. However, the company had experienced a decrease in profits over the past two years. Roy wanted to get at the root cause of the problem and started with a close look at commercial customer metrics.
Roy began by looking at his existing customers. He got a list of customers who had done business with the company over the past 18 months. The list included the customer’s name, sales for the most recent 18 month period, and how long the customer had done business with Mile High Heating and Plumbing. He then sorted the list by sales to identify how sales were distributed. For example, how many customers made up the top 20%, middle 60%, and the bottom 20% of sales. Focusing on the top five customers, he requested that his accountant prepare a customer-specific profit and loss statement to determine the profitability of these top customers.
Using these metrics as a guide, Roy described his typical customer and based on profitability, prepared an ideal customer profile. Then he identified how many potential customers exist in the Mile High Heating and Plumbing marketplace based on his ideal customer profile. After analyzing this information, Roy prepared a marketing plan to attract new customers and increased his marketing budget. Following his plan, over the next two years, both the number of new customers and customer retention rates increased leading to increased profitability.
Do one thing: Determine what you can do to be hyper-focused on your customers. Start by answering the questions listed above.
Thanks for reading.
* Fictitious names and scenarios were used for this example.