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How to Classify Customers and Identify Profit Centers in Your Business


    Justin Hiatt, Knowledge Level: Novice, Keywords: profit, centers

Customers, every business has them, but why would you want to classify them. Are some customers worth more than others? Well, yes and no – some customers are more profitable than others are, while all customers could be equally profitable. Classifying customers helps you take the action right for them, targeting your marketing, and serving their different needs – while improving your profits.

What, Why classify customers?

Different customers require different actions to reach in marketing, to deliver your product to, or in how they implement your product. Your customers can be broken down into general groups reached with different triggers. Some customers are self-service, while others want you to come to them. Remember its "different strokes for different folks." Your ability to customize your marketing will determine how far you can reach into a targeted audience that will purchase your product.

Not only does each of your customers respond differently, but also they need to be marketed differently. Information gained from this understanding can improve the targeting of your customer lists, while you giving you a better response for your specific products. Group those customers with different qualifications; perhaps identify volume accounts verses infrequent buyers or premium product verses standard product purchasers. Those characteristics that make each group unique should be the strength that focuses your marketing to get the results you desire for your business.

We have talked a little already about the fact different customers have different needs, this is very important in classifying customers. These needs spanned product features, financing, shipping requirements, and any other aspect you could imagine in your business. Extending our thinking to look for cycles of individual purchases reveals other aspects of customer categorization. If your product is consumed or wears out over a certain period, group together customers that may need a little call before their product runs out. Another useful mechanism for categorization is to find those customers that recommend your product, because they are a great channel to share new product enhancement or to tell about specials. These individuals are most likely to share the news or to communicate those things you make privy to them first. Categorizing customers into groups by needs and identifying what is important to them allows you to serve them better while fulfilling their desires with your products.

Describing the supply chain

As you get to know your customers, you may find that some customers are not the actual end users of your product. When classifying customers, understand not all customers may buy direct from you, but their needs have to be considered to maintain a viable product. Depending on what you are selling, you may find the actual end user is further down the line – this line we will loosely call a ‘supply chain’, which represents "how" your product gets to your customers.

With any analysis, we want to start with the beginning in order to gain the bigger picture of what is going on with our product before it reaches a customer. Start with the creation of the product (the beginning); do you manufacture the product or receive it completely from someone else? Follow a product around for a couple of weeks asking yourself the following questions:

Who uses it?
Who passes it along to others?
How does this happen?
When purchases are made?
Where is it purchased?
How is it delivered?

Every time the product changes hands from one organization to another, a little connection is made. You can represent this with simple boxes on paper, details on this will be provided later. This big picture approach gives you a better idea of the reach of your product; it could be anything from a screw in the back of a television, or the television itself.

If you manufacture a product, you probably sell it to a reseller or distributor who distributes it to your customer. If you sell directly to the customers themselves then that is fine too. In either case, there are three kinds of product providers, the reseller, the distributor, and the customer. The reseller receives your product to either incorporate it in their product, or turn it around to sell to their customers. Where a distributor sells to the reseller or sells at quantity to a particular customer. Finally, we all should know who the customer it is, they actually use your product to complete a specific task.

You can further classify customers into three types, even if you do not interact with the customers directly. The three customer types we are going to look are the manager, the end-users, and the integrator. Think of the manager as someone to obtain the product for end-users. The end-user ultimately uses the product for its intended purpose. Unless first an integrator received the product and incorporated it into something else the end-user uses. For example, an integrator receives software which is integrated into a computer system producing a the new product for an accounting department.

All of this will help you develop what should look something like a waterfall diagram with your organization at the top. It is interesting but some products are created far from the intended end-user, the more uses your product has the more levels this diagram (your chain) may grow. Just remember, the end-user who finally uses your product, whether they know it or not, is where we are primarily concerned when increasing profits.

Defining the customer

In the beginning, we talked about classifying customers to improve sales and marketing efforts, classifying customers can improve profitability because optimizations along any of the connections in the supply chain can reduce costs without changing product sale price. If you can reduce your cost to manufacture and distribute your product then you can earn more per each transaction. In this section, we are going to talk about your customer, their customer, and the final customer – knowing that these levels could grow and expand depending on where your company is supply chain. For this article, we will assume there are only three levels to your supply chain and your company is at the top of the list (the originator).

A clear definition of who purchases directly from you is the simplest and most direct part of classifying your customers. These individuals are the first level in your supply chain right under your organization. These individuals are most likely buy from you directly for various reasons. Look further at those "reasons for buying" they determine how your customer connects to you. In most cases the customer will use the product themselves (end-user), while in others they turn the product over to the next level below them (reseller).

When your customers turn around your product it is good for you, even if the intended end-user could buy direct, sometimes resellers can reduce your distribution costs and increase product value. This important factor must be taken into consideration, especially if you want to maintain strong channel relations. Customers who buy directly from you are yours – those who purchase from the resellers are their own. Help your resellers and distributors to earn more, but do not steal their customers for the sake of direct sales it will only hurt you in the long run. In the case where you know who "their customers" are, you are in the fortunate position to help "your customer" with leads and growth opportunities. Building the strength of your supply chain actually reduces your costs, even if "their customer" just turns around the product to a final customer, or eventually returns to you for services.

The final customer, third down on your chart, actually uses your product (consumes) and usually does not turn the product around to anyone else. This is the target user that you do not always interact with directly. At this level a lot of valuable information is available about replacements, renewals, and consumption. When you look at these individuals, also look at where this customer goes for help, perhaps they come back to you or they go to a vendor; either way optimizing this part of the channel can improve product satisfaction and increased profits by identifying possible service opportunities.

A clear understanding of each "customer category" expectations and their usage of your product is so important to improve sales and distribution. You will want to make sure you get an accurate picture. Take the time to map this out, start with moment your product leaves your facility and move on from there. A simple diagram can say a lot about your business.

Mapping your distribution system

Your supply chain or distribution system as described here is very simple to map, yet so powerful. Start with a simple workflow diagram, move along to customer interaction points, and then finally clear up the picture with specifics. There are many methods available to do this; I am going to describe the one I use with my clients – this works great for both companies providing services or hard goods.

Creating a workflow is simple, just start with you and work your way out. I like to use a dry erase board to get out my thoughts; many boards will print out your picture or scan it into a computer. For best results use a sheet of 11" by 17" paper –brainstorm first with customers and employees, then consolidate your notes, and finally enter your diagram into a computer using a simple flow chart program. Don’t go straight to a computer, brainstorm on a whiteboard or with paper, it’s easier and takes less time.

Start with a box at the top of one page, this box is your company. Of the different types of customers described earlier, make a few blocks, representing them, just below your block. Use lines to connect each box representing the relationships between each, and then add simple labels to describe the boxes and corresponding relationships. Connectors represent delivery methods, transactions, or anything that would move a product from one box to another.

After you have drawn the relationships from your company to end user, it is now time to look at a valuable feature of this diagramming method, the "customer interaction points." A customer interaction point is anywhere along your chart where any customer talks to you. Concentrate on known ways your customer contacts you; this includes support calls, orders, presales support, and more. I utilize connectors with several off branches describing methods of communications and the type of communications. It is useful to draw this part in a different color than the other items.

Now that you have an overall workflow and it has been enhanced by customer interaction points, now you will want to start getting specific. This means adding in company names, points of contact, and customer category names. Your general boxes start taking life; a clear picture develops as the chart grows with information. Some organization post phone numbers on these charts so they know whom to call during the customer service process – what you do with this chart after this point is unlimited.

Before you start turning this picture of your supply chain into a mosaic of information, remember why we created it in the first place. This picture represents everyone who uses or obtains your products in any form. Reconstruct this picture as often as necessary to develop groups that best represent your classifications of customers. Note at each level how you will market those customers, as well as their individual needs and expectations. From a marketing standpoint you must also consider where to gain the best results, incorporate this new information in your marketing tests or when considering lists.

Sometimes I am almost afraid to show this method of classifying customers to my clients; they get so excited because new ideas will pop out as their chart grows with information. If this exercise is difficult for your organization, or if your chart seems too complex then you have a great opportunity to identify improvements for getting your product to market. Your entire supply chain should fit on one 11" by 17" sheet of paper in a very clear format that shows simple steps between levels – if it is any more complex than that, look for ways to simplify your distribution channels.

By classifying your customers with a clear supply chain, you will see areas to reduce costs and increase revenues. Thos focus will increase profits for your organization with very little effort on your part. Have fun with this, get your employees involved, and start seeing where profitable customers can grow from all levels!

This article is Copyright Justin Hitt 2002

Justin Hitt is a consultant and author of Cultivating Your Best Customers, Part I of II: How to Get more Profits by Cultivating Your Best Customers available online at http://www.justinhitt.com/cultivate-topten. Article on profit, centers by Justin Hiatt
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