A client was consulting me for improving their margins. The company was providing a solution to several customers. A Pareto analysis revealed that about 90% of their business came from just eighteen customers. Seventy-four customers were contributing a meager 3.2% of the total business. We then looked at the records of customer complaints, customer support data, manpower costs, and other things.
Surprisingly, these low-value-high-number customers were asking for more support. They were requesting frequent modifications and rarely placing repeat orders. But the sheer number of these customers was choking the bandwidth of the company. They consumed disproportionate resources. In contrast, the top customers were happy with the company. They rarely asked for anything extra. Probably, the company's offerings were a perfect fit for them. The data was clearly showing the need to act. However, very few companies dare to fire their customers. So, we finally decided the following:
Raise prices and standardize terms for the bottom 80% of these 74 customers.
For the top 20% in this list, develop a plan to increase their lifetime value.
As soon as these changes were implemented, more than half of these customers moved away. Other customers accepted the new terms. There was a slight dip in the top line, but the margins improved significantly. Moreover, the best customers got more attention. The focus on the top customers established a clear priority for the organization. It cascaded throughout the organization across various processes. In a year, the organization had increased sales as well as profitability.
Metrics:
It may seem counterintuitive to fire your customers, but it is critical to do this exercise every year. We need to realize that not all customers are equal. Make it a business resolution this year. Use the 80:20 rule on your customers.
Subodh
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