How can a small business identify its most valuable customers beyond spending?

80% of your productivity comes from 20% of your efforts. Maybe for your company, it is more like the 60/40 Rule or 70/30 Rule or 90/10 Rule, but the point is this: a small number of things that you do give you an enormous amount of your results. There is more wasted time and non-productive activity than there are your truly productive actions. Let’s take a look at why you need to know who your best customers are, and more importantly why some of your top customers may not be your best customers.

Here is where it seems natural to apply the same method to your customer relationships, building close ties with your top 20% of repeat customers. On the surface, this strategy seems unassailable.

The problem is how you’re slicing this group can undermine the strategy. The common way is to just rank repeat buyers by dollars spent over a set period and pick off those in the top 20 or so percent.

Ranking by revenue means you’re not necessarily targeting the most profitable group.

Don’t rate customers by money alone, any more than you would compete on price alone. You need to look at other criteria as well.

A Gold Mine of Referrals

Referrals are another profit source you may be overlooking. Ask a satisfied customer who just thanked you for something special to recommend you to a friend or fellow business owner. If your repeat customers tend to refer other customers, your calculation of their value should include those referrals.

For example, a given customer may be high-ranking under the above strategy but referred no new customers. However, another customer who spent less may have provided a gold mine of referrals. But that customer who brought you many referrals, but didn’t spend much over a year, likely won’t be in that highly valued top 20 percent of customers. That’s a mistake. 80% of your new business should come from your existing business.

You won’t know which customers those are if you don’t keep records of who referred whom and what purchases came from those referrals. Figure out the total revenue from each referred customer and any referrals they produce.

Spend and engagement are not one and the same. Some value is hard to put a price on. So, suppose you find a customer that purchases modestly but is one of your top Facebook Page posters, commenters and sharers. And the same customer may praise your blog posts. They’re an ambassador spreading the word to exactly your target audience. That’s free marketing you’d otherwise have to pay for. A number of loyal fans who made little use of your services or bought mainly inexpensive products, might be worth more than another group of purchasers who bought lots of high-end products but weren’t connected in other ways.

Some Big Spenders Require a Disproportionate Amount of Work

Let’s look at the flipside. Some big spenders require a disproportionate amount of work. If those big purchases are a pain in the neck to you and/or cost you extra, those buyers may not be in your top 20% of profit sources. None of this is an excuse for answering customer complaints rudely or not making an effort to satisfy them. All clients deserve a courteous, professional response. Make sure to conduct a cost-benefit analysis and see if the demanding client truly deserves that extra attention.

Some big-spending customers badly overestimate their value to the business. Once they believe the company or store needs them more than they need the products/services they buy, expensive habits tend to follow. Watch for these signs:

• They want special deals and terms no other customer would dream of. Depending on circumstances, some special terms could be justified. They’re a problem if they ask for those terms and also do these other things.
• They’re perennially late with their payments.
• They eat up too much of your staff’s time. Job costing on the customer can help you account for those extra staff hours. If what it costs to serve them is more than what they buy, they may not deserve membership in that top 20 percent.
• They act as if spending a lot of money entitles them to tell you how to do business. Even absent that, putting too many of your eggs in the basket of one customer is perilous. How long can that go on, and if that one client leaves, how long will it take to fill that gap with multiple new customers? Some say that one customer responsible for 30 percent or more of sales is a serious risk for a small business. Whatever amount it is, depending too much on one client costs you, closing you off from other opportunities.