Do You Know Your A-B-C Clients?
Depending on the client's situation, one of the top five actions we take is to perform an A-B-C analysis of their customer base. This exercise can be valuable for many reasons that impact sales, marketing and operations.
If you are unfamiliar with this concept, essentially, the client generates a list of all of their customers showing total combined revenues and margin over a recent three- or five-year period. After this report is created, the next step is to perform a lifetime value analysis.
First, let's explore the A-B-C analysis. In looking at the report, you will generally see the following trend:
- 15 percent of clients make up 65 percent of sales = A
- 20 percent of clients make up 20 percent of sales = B
- 65 percent of clients make up 15 percent of sales = C
Note: 35 percent of your clients make up 85 percent of your business.
Second, the percentages may not be precise, but what you are looking for is where to draw the lines where you can see a separation. Once you have these lines drawn, we recommend you schedule a meeting with the sales team and management team to discuss what you have found. You want to analyze the various segments and look for common demographics of the As, Bs and Cs. Examples might be:
- Total revenues
- Number of employees
- What vertical markets
- Number of locations
- Types of services/products they purchased
What you are specifically looking for are the common traits of the As and Bs. Then, those kinds of prospects with similar demographics become your only targets for marketing and for sales prospecting. If you purchase databases, those demographics become your criteria. In your CRM system, call frequency patterns are set to connect with all the As and Bs, six times a year. Your focus becomes capturing more As and Bs, not Cs.
The reason to focus on the As and Bs is that, for whatever reason, they are in need of your services, agree to your value proposition and most likely are your best clients.
Third, look at your C customers and perform a lifetime value calculation (this formula is actually good for all clients, but focus on the Cs first). This analysis is run for the past three or five years showing the total cost to acquire a client, cost to support the client over the three or five years, and the real profit generated by the client. In many cases, we have found that companies are over-supporting a large number of their customers and many C-based clients are also the slow-paying, unhappy customers that cause the most pain.
Take an analytical approach to understanding your customer base. It will drive better messaging, increase order rates and improve your profitability -- sounds like an excellent formula to get started on 2015!
Posted by Ken Thoreson on October 23, 2014