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Which Of Your Customers Really Matter?
You might be tempted to answer that "every customer matters!", but, if you did, you could be wasting a lot of your time and energy on customers that earn you little or nothing - or worse, actually cost you money to service.
Key Customer Relationship Management (KCRM) is all about working out which of the clients you deal with should be retained and which are more trouble than they are worth. In a recent workshop, delivered by ABIL to the Middle East-based partners of an international financial services organisation, it became obvious that some partners were amazed to realise how much time and effort they were putting into supporting clients who were actually draining their resources and not contributing at all.
The Italian economist, Pareto, could not have foreseen how widely his work would be repeated and used when he first formalised his "Pareto Principle" in the mid-20th Century, a principle better known today as the "80/20" Rule. For those of you in Marketing, you might recognise its usefulness as the "Heavy Half/Light Half" division, and the number of examples of how often it describes reality is breath-taking.
Have you had a look at your figures recently? Have you checked your records for a break-down of cost versus return? Has your customer service department recorded the areas of your service or customer-base that provides 80% of your problems, or bottle-necks? Can you immediately state the names of the 20% of products or services or customers that provide the majority (say, 80%!) of your income or revenue? You should, it may surprise you.
But, unlike the bank in the UK that, on finding that 80% of their profit came from 20% of their client base and then set about closing the accounts of the 80% of accounts that provided only 20% of the profits, you should think a little more carefully. The bank quickly ran into trouble when they realised that although only 20% of the profits came from this 80%, this same group made a significant contribution to operational expenditure, and closing the accounts (and branches) left an organisation too small to service the lucrative 20% of their clients! What they did do, eventually, was to use the threat of closure to secure more business and healthier contributions from these low-earning accounts.
So, the message is "look at profit, but don't forget contribution". Even so, one of the best uses I have found for the 80/20 rule is when it is applied to customer profitability. Try asking your management team to analyse business results by customer and I believe that you will be able to predict the following:
* 80% of the profitable business will come from 20% of the customer base. This can be of immense help to your sales force, helping them to prioritise their time and efforts.
* The top 10% of your customers (measured by the volume of business they give you) will probably be a loss maker (because they squeeze you on price and demand lots of service support). However, they may need to be kept as they, for instance, offer a way into another client or market that will bring in a better contribution.
* The bottom 10% of your customers (i.e. the smallest ones) will also generate a loss because the volume of business they generate doesn't cover the costs of serving them.
This often leads to a useful debate around costs, resource and value. It also allows management that is stretched for time and resources to allocate both and achieve sometimes outstanding results without needing to recruit, reorder or reschedule.
In support of Pareto's work I would mention that the only management expert to receive a Nobel Prize (1978), Professor Herbert Simon - Professor of Computer Science and Psychology at Carnegie-Mellon - conducted research and wrote articles for many years about how managerial decisions were made. He concluded that management should not seek to make the absolute best decision (to optimise) but simply a satisfactory decision, and these decisions are a lot easier to make when you know who is contributing, and what it is costing you.
What's your opinion?
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