Corporate Value Benchmark #9: Quality of Customers

By Wes Teague| Published May 21, 2014

Do you know who your company’s ideal customers are? Do you understand what draws them to your company? Do you understand how to keep them?

At Indian River Advisors, we’re dedicated to a rigorous research process that most companies and outside advisors do not have. We can help you identify the best customers for your business and gain valuable insights into targeting new customers and increasing customer satisfaction.

According to “How to Identify the Best Customers for Your Business,” published in MIT’s Sloane Management Review, many companies “pursue growth opportunities without adequately defining who their ideal customers are. That lack of clarity can hamper profitable growth.” Authors Frank V. Cespedes, James P. Dougherty and Ben S. Skinner III note that the biggest problem companies have is an “inability to define core customers.”

Every company, no matter what size, makes it easier for some customers to do business with it and harder for others, Cespedes, Dougherty, and Skinner write. “Selecting the right customers is critical, especially if resources are constrained and the brand is little known.”

According to the authors, customers represent “a stream of orders for the seller,” and that stream “has a domino effect on the company’s business.” Different customers carry different costs for the seller. But, the authors write, “Surprisingly few companies—especially entrepreneurial ones—clarify their core customer selection criteria.” Instead, executives tell their sales force to get as many customers as possible, rather than focusing on getting the right customers. “Effective customer selection,” Cespedes, Dougherty, and Skinner write, “focuses on the buyer—addressing the problems or opportunities he or she confronts.”

Customer selection affects almost every part of a business – operating costs, margins, organization, marketing, sales, customer service, and the bottom line. “The choice to do business with a customer also represents an opportunity cost,” Cespedes, Dougherty, and Skinner argue. “The money, time and people allocated to customer A are resources not available for customers B, C and D.”

In “Defining Your Market in 7 Steps,” Entrepeneur urges companies to “practice nichecraft,” and almost all of the authors recommended steps focus on the importance of selecting quality customers. “With whom do you want to do business?” the authors ask. “Be as specific as you can: Identify the geographic range and the types of businesses or customers you want your business to target.” The article urges businesses to focus: “Clarify what you want to sell, remembering: a) You can’t be all things to all people and b) ‘smaller is bigger.’” Successful businesses, the authors argue, “look at the world from your prospective customers’ perspective” so they can “identify their needs or wants.”

In “How to Find Your Best Customer,” Perry Marshall, the author of 80/20 Sales and Marketing, writes about the common tendency “to waste our time trying to please all of our customers instead of the most lucrative ones.” Instead, he recommends remembering this adage: “About 20 percent of your customers produce 80 percent of your sales.”

Not all customers are equal, Marshall insists. “Far from it. Some earn you an amazingly disproportionate amount of money, many make you a little bit of money, and some even waste your time. With the last group, you lose money selling anything to them at all. Your goal should be to zero in on those 20 percent of customers who are essential for your business’ prosperity.”

Marshall then offers several tips for doing just that—from mining your customer lists to identify the customers who have spent the most money with your company, to studying geography to find out where your “money-making customers” live, to firing problem customers. “Paddle away from the 20 percent of your customers who cause problems, and focus on the 20 percent who buy the most from you,” he argues. Marshall admits this will feel uncomfortable. “You are going always to feel as though you are ignoring something—because you are,” but it will pay off in the long run.

Harvard Business Review highlighted one example of the power of focusing more resources on one set of customers – what they call “superconsumers.” In “Make Your Best Customers Even Better,” Eddie Yoon, Steve Carlotti, and Dennis Moore turn to Kraft to make their case. Just over a year ago, they write, Kraft “believed that their Velveeta brand had only moderate growth prospects.” In the current health food market, the processed Velveeta had languished. But as the authors worked with Kraft and analyzed supermarket scanner and consumer panel data, “we found a hard-core group of Velveeta fans. They constituted 10% of buyers but accounted for 30% to 40% of revenue and more than 50% of profits. In focus groups, these buyers—whom we dubbed superconsumers—said that they think of Velveeta as superior cheese.” Kraft focused on these superconsumers to “restart Velveeta’s growth.”

“The strategy inspired a pipeline of innovations to meet new uses,” Yoon, Carlotti, and Moore write. “The previous thinking was that the quickest, easiest path to growth was to identify light users or lapsed users,” Greg Gallagher, the marketing director at Kraft Foods, recalls in the article. “But when we talked to superconsumers, we learned that in fact they wanted to use Velveeta more—they were starving for it.” According to Yoon, Carlotti, and Moore, managers at Kraft “believe they have found a viable growth strategy for the first time in years.”

“In our experience,” Yoon, Carlotti, and Moore write, “many managers are quick to dismiss the concept of superconsumers or to regard it with skepticism. But as companies build up their analytic capabilities, they are becoming increasingly adept at identifying and engaging these consumers. When they do, they not only find that these shoppers have good reasons for buying so much, but also often discover a hidden appetite to buy more—even in the most unlikely product categories.”

At Indian River Advisors, we know it is critical for a business to understand what valuation methods apply and how prospective buyers are likely to perceive the company’s future. Understanding your ideal customer is a key part of this valuation process.

For more information for how to identifying your ideal customer or for ideas about how to increase enterprise value, please contact Wes Teague. Wes has over three decades of experience, ranging from commercial and investment banking to senior corporate management, with a focus on strategic initiatives designed to maximize growth. His background in government and defense contracting, including special clearances, provides an additional level of expertise in this highly specialized arena.