For any organisation, the better you understand your customers the more responsive you can be to their needs. The purpose of understanding customers better is simple: to make your business more profitable by being able to offer your customers what they want, when they want it. This can be achieved by finding out about customers’ purchasing habits, opinions and preferences, and profiling individuals and groups to market to them more effectively. By doing so you will be able to work out who your most valuable customers are by looking at the amount of purchases they make and the average amount they spend.

Generally speaking, businesses that are able to grow their profits quickly are those that can identify these customers, focus their sales efforts towards them and work to bring in new customers that share a similar profile.

It is not cost-effective to spread your attentions across your entire customer database so it makes sense to identify and target your best customers. The first step is to analyse the profitability of your main customers, starting with the top 20% as some of them may not be as profitable as you imagine. The best way to identify who your most valuable, and therefore profitable, customers are is by measuring the gross profit or gross margin they deliver.

A company’s gross profit is the sales revenue minus the cost of producing the product or service (without including overheads such as salaries or premises costs). The gross margin is the percentage of income that is profit before overheads are taken into consideration. For example, if you sell £100,000 worth of products to a customer and it costs you £75,000 to produce them, the gross profit will be £25,000 and the gross margin will be 25%.

Adding all the other costs together, such as marketing costs and the time taken to make the sale, will leave you with what is known as the contribution, which will give you the information needed to determine which customers are the most profitable and which ones are eating into your profits. Many small businesses have inadequate customer databases simply due to lack of investment. However, the ability to identify who your most valuable customers are depends on how you store key information. Investing in an efficient database will reap rewards when it comes to recognising your most prized asset: profitable customers.

However, be prudent and don’t put all your eggs in one basket. Circumstances can change quickly and by maintaining good customer relationships with different customers, you minimise the risk of major problems. If your key customers are other businesses, keep an eye on their overall performance. The bigger the customer, the more carefully you should analyse their prospects. For example, if a customer accounting for 50% of your revenues went bankrupt, you could face serious problems.

Holding on tight
Once you have identified those customers, the next step is to ensure you hold on to their business. In order to retain and develop existing customers, you will need to ensure they are completely satisfied. Find out from your customers what their needs are now and ensure these are regularly kept up-to-date as customer needs change over time. For your most valuable customers, meet – if not exceed – their requirements and preferences. Also make sure that you have set aside sufficient time to deal with your key accounts and record additional information on your customer database.

Other options to consider in helping you to build strong relationships with your main purchasing decision-makers include:

  • Automatic notification when better deals become available
  • Newsletters tailored to a customer’s specific area of interest or exclusive material for your best customers
  • A customer extranet or online account-handling facility: this could give customers direct access to their own order history, stock levels and details of deliveries
  • Some customers could be offered added functionality, for example greater flexibility to tailor and specify their orders

More of the same
Once you have ascertained who your most profitable customers are, you can tailor your sales and marketing efforts to bring in new customers with similar profiles to existing ones to further boost your profits.

Understanding the market in which you work is imperative. As well as identifying the general type of customer you wish to attract, you also need to actually identify the potential customers you can go and sell to.

Talk to your existing key customers and assess their changing needs to find out why they are buying from you. This information will help you target similar people, as the needs of your potential big customers will probably match those of your existing ones.

However, the crucial point to remember throughout the process of identifying new key customers is the importance of maintaining the highest levels of customer service to your existing valuable customers. Targeting new ones takes a lot of time and effort and if you let standards fall you risk losing existing and new customers.

Just as important as knowing your best customers and attracting more of them is being aware of which of your products or services are the most profitable. Broadly speaking, an analysis of your company will probably reveal that roughly 20% of your products generate 80% of all your profits. Ensure that these products are marketed proactively to your key existing customers and those you want to attract.

It’s also important to make sure you continually keep abreast of changes and monitor wider trends. Nothing in business stands still: exchange rates vary, costs rise, competitors cut prices and introduce new models. You need to monitor all of these, and use this information to adapt your firm’s marketing activities accordingly.

Onwards and upwards
Up-selling and cross-selling are techniques of selling more to your customers, which you may have already used but will certainly improve your profits. Up-selling involves selling your customers more of a product or service than they’re already buying, or else a different and higher-priced product or service. For example, if a customer is looking at buying a £13,000 car, the salesperson might try to up-sell them to a higher-spec car that costs £18,000.

Cross-selling involves selling different products and services that may complement a customer’s past purchases. However, you must understand your customers’ needs before you attempt to cross-sell to them. There is no point in trying to sell products and services to customers, who are interested in something completely different. This will only annoy them and risk damaging your relationship with them.

The key to being able to increase profits is getting to know your customers and understanding their preferences and needs. By focusing on your most profitable lines and the customers who bring you the biggest profits, you’ll know that your business really is working at full capacity. And when the money starts to flow in, that’s when you can think about expansion.

Kim Fletcher is a business adviser for Business Link Kent