- Never leave money on the table. Management's job is to maximize profits.
- Some customers are high profile and sought for prestige. They can influence other prospects, like the celebrities who get free clothing or jewelry from sponsors.
- There are some customers who cost you more than they are worth.
- Sales people on commission don’t care at this level – their job is to get the order and the commission (especially if they are judged by bookings).
So what is the answer? Do you give your best offers and discounts to new prospects or existing customers?
Answer: It depends. You need to determine; 1) how valuable the customer is to you and 2) how flexibility the market and shopping around is for the buyer.
Customer Value means profit. Pareto’s Principle (80/20 rule) applies: Approximately 80 percent of your profit will come from ~20 percent of your customers. These are the customers who buy your higher end products and services, subscribes to updates, routine services, etc. There are other customers who do cost you more than they are worth through buying low volume/low margin products, requiring extra support, are remote, never being happy, bad mouthing you, etc. Focus on the customers who bring in the money and keep them happy. Learn to treat the others differently so that they don’t drag you down, e.g. charge zone fees for services, give priority support to your premium customers,even raise prices or minimum order levels for the less profitable customers.
Flexibility refers to how easy is it for the buyer to shop around and switch. In the home improvement business, Home Depot and Lowes are almost always near each other so the buyer can easily go the store he likes. People can now go online to make most purchases. Flexibility may be based on personal factors and the particular situation. For example, many at work buy auto insurance from an affinity company that offers direct payroll deduction. They might like another insurance company but the direct payroll deduction makes the auto insurance easier to buy and renew.
Yale University Professors Jiwonong Shin and K. Sudhir studied the idea of "punishing or rewarding current customers" in their 2008 paper "A Customer Management Dilemma: When Is It Profitable to Reward One's Own Customers?"
Their general rule is:
- High Customer Value + High Flexibility = Retain Existing Customers (Retail, Airlines, Car Rental & Hotels catering to Frequent Business Travelers)
- High Customer Value + Low Flexibility = Go after New Prospects (Mobile Phone Providers, Cable TV Providers, Landlords in high occupancy areas)
- Low Customer Value + Low Flexibility = Go after New Prospects
- Low Customer Value + High Flexibility = Go after New Prospects (Health Clubs)
In only one situation do they suggest going after the existing customer base: customers with high value and high flexibility. Going after new prospects should take precedent in all other scenarios.
The "rewarding" of customers does not necessarily have to be straight forward offers or discounts during the next purchase request. In the Business-to-Consumer world, many businesses use frequent user clubs where purchases become member award points that can be redeemed in some future form. Free hotel, airline seat, or car model upgrades are reserved for high value customers.
It's a good general rule although human emotions tend to turn most situations into individual exceptions, especially when a customer threatens to go take his business elsewhere. Do try to understand whether you have a "good" or "bad" customer, cater to the 20% of your customers who make the most contributions to your purchase volume and profit, and learn how to treat your less profitable customers differently.