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Identifying Profitable Customers

identifying profitable customersIdentifying profitable customers is essential to a business’s success. Often I hear from financial leaders… “I don’t need to worry about the customers; that’s the marketing and sales team’s job.” WRONG. Everyone in your company should be concerned with your customers because without them, there is no business.

If it turns out that most of your customers are unprofitable, you have a problem. The two most effective ways to address unprofitable customers is by either cutting costs or raising prices.

There’s an easy way to do both, but you can only find the detailed plan in our Pricing for Profit Inspection Guide. Download this guide for free by clicking here.

Why Identify Your Most Profitable Customers?

So why should you focus on identifying profitable customers? If you are in charge of managing profits and cash flow, you must know your customers. Truth is, not all customers are created equal.

identifying profitable customersEver heard of the 80/20 rule? Typically, it is used in reference to productivity. But the reason why you need to identify your most profitable customers is because often, 20% of your customer base makes up 80% of your profit.

There are several things that you need to ask yourself when identifying profitable customers…

  • What is your customer segmentation by channel?
  • Who are your least profitable customers?
  • What products are being bought by most profitable customers?
  • What product most often purchased?
  • Which are your most profitable products?
  • What services are utilized by profitable customers?
  • What are the costs (tangible and intangible) associated with profitable customers? Unprofitable customers?

What do you do with the unprofitable customers?

Some indicators that a particular customer is likely unprofitable are abusive behavior to your sales and support team, general aggravation, seeking undeserved credits, requiring more time than the typical customer, and not completing tasks to move along project. Although there are more indicators, this list gives you an idea of what to look for to identify your unprofitable customers.

How to Identify Profitable Customers

An example… in working with one of our clients, we discovered that people ages 45-65 were their most profitable customers based upon the length of time they subscribed to their product. On average, those in that age category subscribed for 14 months. Whereas, those under the age of 45 only subscribed for 3 months. When we worked with our client to calculate cost to acquire each customer and the lifetime value, we were able to make an educated decision to invest in those ages 45-65.

Now that we have identified our client’s most profitable customers, our client puts a large portion of marketing funds to the ages 45-65. A customer outside of that target market is still a viable customer, they just don’t get as much marketing attention the since they are not their primary and most profitable customer segment.

Service Companies

For example, in the service side of our company, we monitor the costs associated with that particular client. If we find that we are spending more than we are making, there are two things that we need to do: figure out why the costs are so high and calculate whether we need to charge more. By knowing our unit economics, we are able to quickly judge whether a client is profitable or not.

If your costs are too high for what you are charging, it’s time to price for profit. Download our free Pricing for Profit Inspection Guide to easily discover if your company has a pricing problem and fix it!

Product Companies

Typically, a product is sold at one price point. Because of that, some companies may fail to look at the profitability of their customers. As we have worked in multiple industries, we have found that there are several areas to look at to improve profitability, including the following:

  • Customer Base
  • # of Products Purchased
  • Demographics
  • Lifetime Value of Customers
  • Channels

By using these areas, our clients have been able to shift their focus on their profitable customer base (and lookalike audiences) and consequently increase the number of products purchased per customer, decrease refunds, and increase the lifetime value of a customer. Sounds a little bit like marketing, right? But as a financial leader, you must operate in sales, marketing and operations to effectively lead the company forward financially.

identifying profitable customersNurture Profitable Customers

If you’re identifying profitable customers, you might see how the company can nurture its most profitable customers. What does your support department do differently with the favorite customers versus those that ruin their day? Partner with your sales and support teams to address how to better nurture them.

How to Deal With Unprofitable Customers

Because there is a limited amount of time in the day, deal with your unprofitable customers and set up procedures to address them to ensure economic success.

Don’t Focus On Them

If you keep giving five star service to those that abuse it and continue to demand or expect excellence, you are going to experience increased costs (and frustration from your service team) associated with servicing that customer. Remove the focus from them.

How would you go about doing this? Encourage your front line employees to provide limited attention. Sure, some customers will leave. But in all reality, you don’t want to keep those customers AND it’s easier than you having to fire them.

Set Boundaries

In the case that you have a client who abuses the kindness of your front line employees, you need to call a meeting to address those behaviors AND set boundaries between the customer and the company. If you’ve been in business long enough, think of that client who did all of the following things:

  • Demanded too much time
  • Didn’t do what they were told
  • Expected more than they were willing to pay for

How is this a financial leader’s role? Make employees feel like it’s okay to do so, and they won’t be punished for impacting the financial success of a company. Show your team the economics, and give them the power to push back against those unprofitable customers.

Increase the Price for a Service

Price is often one of the largest deciding factors for a prospective customer when deciding which firm they want to work with. It would only make sense that to make up for the hassle factor of unprofitable customers, you need to increase the price you are charging for your service. Chances are, if you find them difficult to deal with, your competitors do too and have adjusted their prices accordingly.  To learn how to price for profit, download our Pricing for Profit Inspection Guide.

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How do you tell an entrepreneur that their business sucks?

business sucksYour business sucks…
How does that make you feel? Probably upset, maybe a little defensive. But what if it’s the truth? Many entrepreneurs generate new ideas as if it were a bodily function. As you have likely seen, not all ideas result in a multimillion dollar venture. Some of those ideas will fail to even bring a penny in!
In the business world, no one will outright tell you idea or business sucks because of business etiquette. However, that doesn’t mean that people don’t think it. After working with CFOs and Controllers for the past 25 years, I have learned that the majority of financial leaders will not tell their entrepreneur (or boss) that their business sucks, even when it does. Unfortunately, the truth needs to be told.
Before we go into how to give them the bad news, it’s critical to identify if there really is bad news to give.
As the financial leader of your company, it’s your duty to vet new ideas. This is part of the responsibility of being a wingman to your CEO. If you’re interested in learning how you can elevate your status, download the free How to be a Wingman guide by clicking here.  

How To Identify If Your Business Sucks

Have you ever seen an ugly baby? Most of us have, yet no one thinks that their baby is ugly. In much the same way, entrepreneurs think that all of their ideas are home runs and most people won’t tell them that their idea baby is ugly.

Unfortunately, all entrepreneurs are going to make at least one wrong call. Because you are their wingman, you should be guiding your entrepreneur to take financially sound risks. But before you tell your entrepreneur their business sucks, there are a couple things to look at when identifying whether an idea or business is worth investing in.

business sucks

Is it profitable?

If the idea or business is not profitable, you should not pursue it. This is the easiest way for a financial leader to identify that the business is not going to be successful. As the financial leader, you should be able to steer your executive team to a more successful and profitable road.

Are customers leaving?

Churn. If your customers are leaving quicker than you are bringing new ones in, your business probably sucks. Churn is one of the KPIs that we use to indicate the success of our business. If you are not able to reduce that number in your business, then your business will likely fail. A business cannot survive without its customers, so this is a telltale sign that your business sucks.

If customers are leaving quicker than they are coming in, look at your current strategy and pivot. This may mean that your entire business strategy is not working or just a small sliver of it. The product may not match your audience. As a financial leader, it is important for you to understand both the sales and operational legs of your company. Finance doesn’t have to be simply a cost center. You can only cut so many costs in the business before you need to turn your focus on how to improve the business itself.

No Buy-In From the Team

If you, the entrepreneur, or the person who came up with this new idea or business strategy is left all alone without any support from the team, that’s a problem. An idea cannot successfully come to fruition without buy-in from the team. Why? Because the team’s support and belief that this idea will be a winner is critical to its success.

Have you ever been told to do something that you truly didn’t believe in or want to do? Most likely, you didn’t put your best effort into that task. Other tasks took priority in your book so that you would not have to bring that idea to life. You may have spread your negative attitude towards “it” to other employees, essentially building a coalition against “it”.

I have been there. My clients have been there. You have probably been there (either on the ideation side or the fulfillment side). That is why it is essential to have a strong buy-in from the team when deciding to pursue a new business venture, idea, or strategy.

business sucksThe Numbers Don’t Add Up

Oftentimes when someone isn’t in the day-to-day financials and doesn’t understand how an idea impacts the company, it’s easy to punch a few numbers in the calculator. This habit is what leads to people being calculator rich. Even if the person operating the calculator knows their economics, it’s easy to be blind to the bigger picture when you have a shiny idea sitting on your desk.

But after the dust has settled, it is important to nail the numbers down out to see if it is really viable to pursue. In my business, I consistently have to reevaluate whether the numbers actually add up after I have had a couple hours or days to sit on it.

How To Let the Entrepreneur Down Easy

Naturally, entrepreneurs are bold, risk takers. If you outright tell them that their idea isn’t the best thing since sliced bread, it’s going to hurt their ego (and potentially more). They are all excited about this new idea, and they are great at convincing you and making it incredibly difficult to disagree with them. You want to let the captain of your ship down easy, but how do you do that when the truth is… Their baby is just plain ugly.
HINT: You have to be a trusted advisor to your entrepreneur. (Download the How to be a Wingman guide to start letting your entrepreneur down easily, while still moving forward.)

Your Baby is Ugly

Several years ago, I had a client who wanted to get out of a lengthy banking relationship. Red flag #1. This client had broken several debt covenants and were out of compliance. The bank was telling my client that their baby was ugly. They were put into a work out group, where it was the bank’s decision to either work them back into compliance or kick them out of the bank. Why was my client’s business so ugly? It started with their financials.

Instead of going through the process of fixing the ugliness of the financials, my client wanted to break up a long-standing and generally successful relationship. The owner was hurt and felt defeated. When I started working with the owner, I explained that there was an opportunity to fix the financials, get back into compliance, and grow like crazy. It wasn’t like they had severely strayed off of the pathway to success, but they were riding on the backroads. My job was to let the entrepreneur down easy.

“If it were my company…”

The way to do this is to go back to your pre-marital counseling. One of my team members just recently got married, and we were joking about some of the things she learned in pre-marital counseling were the same things I heard 30+ years ago. To prevent any blaming or hard feelings, it’s important to fight with feelings. No one can argue with your feelings. “I felt _____ when you did ______.”
The same methodology happens in business. Start by saying, “if it were my company, I would do this…” A) No one can argue with how you feel you would do something differently. B) You’re not telling them their business sucks but rather having a conversation. C) There are no hard feelings.
For example, if one of my team members suggests ideas to better my business, I’m going to be more open to those suggestions. However, if she starts telling me that I’ve screwed up and my business sucks, I’m going to get defensive. Create a dialogue, rather than an argument. An idea is just an idea in the beginning. Even if the idea becomes a reality in the end, I, as the entrepreneur of my company, have the final say so.
Guide your CEO or entrepreneur effectively as their wingman. This ability to be the trusted advisor your CEO needs will elevate your status, increase the amount of trust, and steer your company to success. Download our free How to be a Wingman guide today!

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Capitalization Rate Example

See Also:
Capitalization Rate
General Ledger Reconciliation and Analysis
Valuation Methods
Shareholders Equity
Planning Your Exit Strategy
Mergers and Acquisitions

Capitalization Rate Example

John started a real estate company in Indiana. His company has recently begun operations and is beginning to make money. John now wants to strengthen his business; to do this requires the best understanding of the company and it’s working environment. John wants to know the capitalization rate of his company as a whole. This includes net operating income and costs for the financials of the entity.

John speaks with his accountant and finds the data to calculate his capitalization rate. With this, he can find his answer.

Net income = $1,000,000 Cost = $250,000

Capitalization Rate = $100,000 / $250,000 = 4

John knows that his capitalization rate is 4. Next, he speaks with his accountant. He finds that, for this industry, John is doing fairly well for himself. He can use the net income, beyond cost of the bank loan he took, to pay down his loan and begin expanding the company on cash flow. This has immense benefits for both John’s growth and profit potential. John begins to compare the capitalization rate with the discount rate that banks take to create expectations for his next capital project.

He is very happy to hear this. John can now find out how he will use the money rather than worrying about what he will do to please his banker. With the future in sight, he can become a forward thinking business owner.

Conclusion of Capitalization Rate Example

By developing a better understanding about his company, John is more likely to be running a successful and profitable company. The capitalization rate is a good indicator of the overall capabilities of the company. By utilizing the capitalization rate, John now has the overall profits of the company compared with the overall costs of the company. The ratio created is useful for John because it shows that the overall profits of the company is four times that of the overall costs. As said above, John now knows that he can now concentrate on expenditures of money because his capitalization rate is so positive.

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Do You Know Who Your A-List Customers Are?

Do you know who your A-list customers are? I was in a board meeting last week when I heard an interesting story from one of the other board members. Mike recalled when he was a young man and developed an interest in electrical work. While continuing to work at his day job, Mike developed a skill for doing light (pardon the pun!) electrical work.

As time passed, the demand for Mike’s work increased. He would do odd jobs for people on the weekend and at night. He would install flood lights, ceiling fans and fixtures. In addition, friends and family would request favors which he was happy to do! As the request started pouring in Mike started keeping two lists; one for paying customers; the other for favors.

One day his brother-in-law asked if Mike would do a favor by installing a flood light for his father-in-law. Mike agreed and put the name on the list. Several months went by and the brother-in-law had not heard from Mike. When he asked Mike why he had not installed the light, Mike explained his two lists.

The first list was the A list. This list consisted of paying customers. The B list was for favors. Mike was happy to start working on the B list as soon as he had completed the A list. The brother-in-law thought for a moment, then said that he would like to be moved to the A list.

Do You Know Who Your A-List Customers Are?

Often, we lump our own customers together. We treat the loyal customer who pays promptly the same as the demanding customer who is never happy and pays slow! In fact, it is often the demanding customer who gets more of our attention.

The lesson of this story is that we should have an A list and a B list for our customers. The A list should consist of those customers that pay on time, value our services and refer our name. The B list is for customers that don’t value our services, dispute our fees and are late or slow paying our bills. We should constantly be increasing the length of the A list and shortening the B list.

Learn how you can be the best wingman with our free How to be a Wingman guide!

Do You Know Who Your A-List Customers Are?

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Do You Know Who Your A-List Customers Are?

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