It might be necessary for businesses to use a more Segmented approach with their Customers post Covid19

In these unprecedented times where many businesses are struggling to recover and remain viable there has never been a greater need for business optimisation and examining all aspects of how our business is operated and what could be streamlined or improved. The most obvious areas which businesses will explore in this type of optimisation are likely to be cost reduction, improving staff efficiency, increasing staff productivity etc but strange as it may appear, this optimisation exercise may also need to include our customers.  Now more than ever before it is critically important to understand the type of business we are doing with each of our customers, the profitability of that business and the level of growth and sustainability that can be foreseen going forward. 

Visualising our Customer Segments

Below we can see a simple quadrant diagram which can be very useful in terms of visualising one type of segmentation we could quickly apply our customers to help us get a better understanding and make certain decisions within our business. In this instance the customers are categorised based on the Margin they are generating for our business but also in terms of the Sustainability or longevity of this business. 

Lets first examine the Margin aspect and here we could position our customers along the vertical axis based on the size of the margin ( in monetary terms ) which this business relationship generates for us. Monetary calculation of the Margin is better to focus on initially as opposed to % Margin which can sometimes be misleading in terms of the overall impact on our business.

On the horizontal axis we are focusing on the level of Sustainability i.e. is this the type of business relationship we think will last and will continue to generate good Margin for us ?Within this question we also need to carefully consider the customer’s own business and ask ourselves some questions i.e :-

• are they doing well in their particular sector ?  
• is it a well-run profitable business ?  
• how has Covid19 impacted this Customer's business ?  
• is their business actually sustainable ? 
• do they still see some growth potential ?

This combined view of Profitability and Sustainability, even if not fully accurate will still give us a reasonably good indicator as to how the business we do with each customer actually benefits our own business.

Knowing what to look for and what to do is important

Now if we take a quick look at each of the four quadrants in the diagram we could create a simple theme for each one as follows :-

RETAIN  = those customers who may not necessarily generate the highest revenue & margins for our business but they are still solid customers who are likely to be around for a long time and which will therefore offer an element of security and certainty. At the start of each financial year we should be in a position to predict what revenue can be projected from these types of customers and our management of this customer should be based on avoiding complacency, continuing to deliver high value solutions, maximizing the business we have with them and understanding how to improve costs, efficiency and ultimately improve the profit margin.

INVEST & GROW   = those customers who can offer you sustainability but also generate very good margins for the business. These are the customers you really want to attach your business to, building a stronger relationship as a trusted business partner and investing in innovation where possible to continuously bring more value added solutions to the table. If these customers can continue to grow then our business can grow with them but we need to continuously put ourselves in their shoes to anticipate understand the types of "pain points" and business challenges they may face and ensure we always have solutions to offer.

INVEST & DEVELOP = those customers who may have the potential to be in the top right quadrant but who may need time to develop their own business in order to get there. Of course it is possible that this type of customer may also have been adversely impacted by Covid19 thus putting at risk their own level of sustainability so it is important to anticipate this and have a plan to deal with it. The profit margins may be lower than we would like with this type of customer but we see market potential for them to grow and for our business to grow with them. Developing the relationship with this customer may also require a level of investment both in terms of time and/or resources but this could be a gamble worth taking based on seeing the growth potential which exists.

EXAMINE = those customers which are perhaps not currently justifying the amount of time and effort we put into them and when we compare with clients in the other quadrants they fall well short in terms of overall business returns. Perhaps this customer has seen a massive negative impact on their business due to Covid19 or they may even have struggled in advance of Covid19. It is very important to fully understand the customers that fall into this category. We should not jump to any conclusions as by default all customer relationships should be managed and nurtured and indeed we can become a trusted partner to such customers if we can contribute to helping them out of their current business predicament but certainly a detailed examination of the profitability of this business relationship should be undertaken, focusing on the time and effort and the return for this time and effort compared with customers in the other quadrants.

There are other forms of Segmentation

Using a simple quadrant based approach as illustrated above we could also segment our customers based on other elements such as the Strategic importance of the relationship or the potential for Scalability or Internationalisation of the customer's business or even based on the level of Innovation and future evolution plans which they have in place. We can combine each of these and none of them is an exact science of course but it does make us think about our business and our customers and sometimes when we step back and do this the results can be very surprising.

As a simple rule of thumb with the quadrant model such as above we should be aiming to move as many customers as possible into that top right quadrant in order to maximise the profitability and sustainability of our business. 

The 80:20 Rule may also Apply

Aside from the types of Customer Segmentation referenced above the 80:20 rule could also be applied to many different business scenario. I am sure we have all heard about the 80:20 rule and have probably seen so many references to it in business terms that sometimes we may even gloss over it. But what does this mean and how can we use it to positively impact our business ?

In simple terms the 80:20 rule could suggest that 80% of our revenues or profits may actually come from as little as 20% of our customers. Obviously this is a generalisation and it might not always work out exactly that way ( it could be 90:10 or 70:30 or 60:40 etc ) but nonetheless this forces us to think about certain aspects of our business a little differently.

Wouldn’t it be great to think that by only focusing on 20% of our customers that we could still generate 80% of our business ??   A welcome scenario of course but in most cases it may not be quite as simple as that but combined with the type of Segmentation referenced above doing the analysis internally to understand where the bulk of our revenues and margins are coming from may help us re-distribute our energy and efforts a little differently in order to maximise the return for our business.

Summary

In these unprecedented times many tough decisions are having to be made across all types of business. The key focus right now is on business recovery and survival but in time, particularly in a B2B environment, the emphasis will switch to sustainability and growth. Knowing that we have enough of the right types of customer relationships to set our business up for this journey is going to be a very important factor in how we can face the next set of challenges.

John Flynn is a specialist in Professional Services and Software enabled Solutions with Eirtech (https://eir-tech.com ) – supporting companies in Ireland, UK and Europe with Services Strategy, Services Innovation, Services Operational Excellence and Solution Sales to drive better Business Outcomes.