Know Your Customer Metrics: Improve Business Profitability and Value
Renita Wolf, MBA ??
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Know Your Customer Metrics: Improve Business Profitability and Value
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, providing personalized experiences, quality products, and friendly, responsive service.
But what do you know about YOUR customers?
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 depends on only a few customers for most of its revenues, develop your marketing and sales plans to increase customer diversity and drive the value of your business.
Drill Down to Customer Metrics
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.
A Case Study: Mile High Heating and Plumbing
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.
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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. In addition, safety and risk management are priorities for the company. Until now, most of Roy's attention was devoted to improving internal operations. However, the company has 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%, the 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 prepared an ideal customer profile based on profitability. Then he identified how many potential customers exist in the Mile High Heating and Plumbing marketplace based on his perfect 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, the number of new customers and customer retention increased, leading to increased profitability.
Know Your Customer Metrics: Ask These Questions To Get Started
- Who are your existing customers?
- How many customers do you have?
- Describe your typical customer.
- Who are your target customers?
- How many potential customers exist in the marketplace?
- What is your current market share?
- What is your target market share?
- What percent of revenue is from your largest customer?
- Who are your top five customers?
- What is the profitability of your top customers?
- How are customer sales distributed? For example, how many customers make up the top 20%, the middle 60%, and the bottom 20% of sales? For the top 20%, how long have they done business with your company?
- Describe your marketing/sales cycle: How long is it? What is the typical sales cycle between initial customer contact and the closing of a sale?
- How does your sales pipeline look?
- What is your customer acquisition cost, lifetime value, renewal rate, and attrition rate?
- Is your marketing spend on attracting customers increasing or decreasing?
- What is your total number of customer leads year-over-year?
- What are your customer conversion rates year-over-year?
- How many new customers/subscribers do you have year-over-year?
- How many customers have you lost vs. gained year-over-year?
- What is your measurable percentage of customer satisfaction?
- What future threats/risks exist in retaining your customers and attracting new ones?
Do one thing: Determine what you can do to be hyper-focused on your customers. Start by answering the questions listed above.
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