Customer Profitability: Are You Marketing To The Right Customers?
Many business to business companies define their marketing strategy success as growing market share, increasing account share, and customer acquisition, satisfaction, and retention. Despite these measures of customer success, companies lose sight of the profitability objective and the need to maximize their profits from selling products and services. In order to satisfy customers, companies take reduced margins and may lose money with them. They offer additional discounts, product features, and services to their large customers, but do not get prices that cover the costs for these additional features and services.
In developing the market plan and targeting and segmenting markets, we suggest that you want to attract customers that contribute to company profit. This is not easy!
- Customer cost is hard to track because accounting systems are not designed to track customer by customer costs
- Focusing on customer profitability can lead to decisions that are different than decisions based on other metrics, such as market share. I.e. Higher market share is not necessarily better, because low value customers may have been acquired to increase share
- Customer profitability brings together marketing (customer is the focus and we have to provide value) and finance (how much value do I get from this particular customer?)
- If we don't provide value to a customer he won't buy anything, but if he doesn't provide value to us, do we want to spend resources pursuing his business
Some typical metrics that can be used to measure individual customer profitability and tailor market strategy are:
- Margins on purchase
- Technical support costs
- Marketing and sales costs
- Accounts receivables
- Inventory programs
- Special requirements
- Returns
- Intangibles (ie fill machine production in slow times)
Many companies have experienced profitless revenue growth because the market strategy and marketing plan may not target the right customers. Commercial market research, and solid market and competitive analysis will help identify the profitable segments. Developing tailored business to business marketing programs to improve inbound marketing through improving public relations efforts, website design, and search engine marketing and optimization can decrease customer acquisition costs. Aligning marketing programs to make the customer focus consistent with financial objectives is important to achieve success in today's business to business market climate.