Target Market 2 of 5:
Who Are Your Most Profitable Customers?
This is video no. 2 in our 5 Part Series on your Target Market. I want to talk to you today about your most profitable customers!
Who are your most profitable customers?
Is it the ones that you like the most? Could be. Is the ones that you do the most work and service for? Could be. How do we know? We want to do a little test called the 80-20 Test.
I’m sure you’ve heard the 80-20 Rule:
This is done by Pareto who is an Italian guy who realized in the 1800’s that 80% of all of the land in Italy was owned by 20% of the population. He looked at other things and found that this 80-20 Rule starts to show up in all different areas of life. And it’ll show up your sales and your profitability.
What we want to do next, is to run a report of our accounting system:
If you’re using something like QuickBooks, it’s going to be your Profitability by Customer Summary Report. Also your Sales by Customer Summary Report.
We want to export that out to Excel:
And then sort it by Highest Revenue to Lowest. You’ll have a list of your customers and you’ll have the ones at the top of the list that have the highest revenue with you, going all the way to the ones who have the least revenue with you.
And then you want to do a little count:
Say “if we have 100 customers, let’s just count up the top 20 and see how much revenue do they really represent.” The 80/20 Rule isn’t exact, but it’s going to be something like 80% vs 20%.
Meaning, 20% of your customers will be bringing you 80% of your sales.
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And it could be a slightly different 20% of your customers that will bring you 80% of your profitability:
So we want to do the same exercise with our Customer Profitability Report. Again, run that report and have all your customers listed by the most profit to the least profit. Those clients are going to be the ones that really are your gems.
That top 20% that brings 80% of all of your profitability.
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Once we know who those 20% are, what to do next?
Well, we want to get more of them right? These are the guys that are usually easy to deal with, they pay on time, we might even really like them, like we talked about in our last video with our Psychographic, they might be people we just really enjoy serving.
We want to get really clear on: Who are these folks?
So that we can go and get more of them. Then we can deal less and less with the smaller profitability clients. Because, again, all those other 80% of your clients, they’re taking up a lot of your time that you could be dedicating towards growing relationships with your best customers.
Next time we’re going to be talking about how we figure out why these customers are the most profitable, what to do about that, and where to get more of them. Stay tuned for Issue 3 next week, in our 5 part series on your Target Market.
I look forward to seeing you then!