You have to value your clients, naturally and practically anyone in business knows and understands this rule. What’s little known though, especially amongst startups is that your clients also present value to your company. In other words, you should do your best to retain customers but you also should primarily focus on those that you gain the most from.
In today’s post I want to introduce the idea of grading your customers and two systems for doing so.
Customers are the life blood of any company. While some are not in direct contact with them (product based enterprises) and their relation building is somewhat specific, most service based companies rely on their relations with their customers to survive.
However, quite often companies regard every one of their clients worth spending all their time and resources on. The reality is quite the opposite, out of all of your clients only a handful provides you with the most of your income, the rest are:
- People who purchased or used your services but will probably never come back (they usually don’t have the need for that service again. Some industries are plagued with such clients, take web designers as an example)
- Clients who try you once, usually for your price but the minute someone cheaper comes in, they abandon you without looking back. They probably weren’t disappointed with your service but their primary objective is to spend as little money as possible and thus they are always on the lookout for someone cheaper.
In my old company we have always graded clients, we used a simple system of grading them from A to D with A being a very good customer and D being one not worth paying much attention too (sorry, harsh reality but it is true, there are clients like that).
Now, I know that many of you might object to such practices however I would urge you to continue reading and I hope that you will understand why we have introduced it to our operations.
I won’t even try to claim that we were in any way original in grading clients; it’s an old system, known and taught since forever probably. It is one of the business’ tools for survival but naturally, it doesn’t mean that you pay attention to the best customers only. It means that you spread your focus based on the grade.
You pay the most attention to A-grade clients and the least to D ones, simply. This way you work smart and use your resources where they can bring you the most return.
There is a number of ways to grade your clients, or in other words, to find out what is their real value to your company.
In order to calculate it, you need to multiply the average transaction size by the number of transactions per year and a number of years as a customer. The result is an Estimated Direct Lifetime Value. You then add to it a Value of this Client Referrals and your final result is the Total Lifetime Value of a Customer.
The typical calculation would look pretty much like this:
Why would you calculate it? To know how much the client is worth to you, of course. They may be a good friend and a lovely client to chat with but if their Total Lifetime Value is low they may not be your primary target when it comes to investing your time and resources in retaining the client.
There is another reason you actually should do these calculations to all of your clients. Doing this will help you estimate how much money and income your clients will be bringing your business. Of course, the figure will only be an estimate; however, it is still a figure that you should know. It might reveal how badly you might need better clients, or how safe you are with your current client base. It will also reveal to you if you do not rely on one client too much when it comes to your cash flow.
In my company we used a slightly different system for grading our customers. We have used a 4P’s system (4’s standing for Price, Promotion, Prospect, Pain) to assess a client. In other words we would check each client against those four factors:
1. Price. How much is the client paying us? Are we making good money for him or do they always try to get a discount? What about payment, is it always on time or do “cheques get lost in the post” all the time.
2. Promotion. Is the client adding value to our business? Are they a well-known business worth having on our books? Is there any promotional value in them? Are they bringing many referrals? Do they help us grow our business or just consider our dedication as a given and demand more?
3. Prospect. What’s the prospect for more work from the client? Are they a one-off or someone with the constant demand for our services? Are they likely to develop into a client buying regularly (or are already doing so) or will be making just occasional small purchases. We would usually back this up with the actual history of purchases per client however sometimes you just need to estimate this factor too. It all varies from industry to industry.
4. Pain. How easy are they to work with? Do they keep their promises or usually just demand without offering anything in return? What about time and project management? Are assets always on time and projects run smoothly or is this a client that we have to constantly chase for everything, whose projects are always delayed, and ultimately our production schedule is affected by this?
And we would combine this with actual figures how much each client was paying us over the course of the year. We would work off a chart like this to assign a value to our clients:
Why systems like this one? Because I have always believed that money is not the only factor when it comes to figuring out who your best clients are. There are other things worth considering like ease to work with and potential promotion or a prospect for more work.
Naturally, we would also move clients from grade to grade depending on how the relationship was going. No client would ever start as an A client straight away but would build their grade over.
Because it is impossible to predict how the relationship is going to turn out the very beginning. I learnt this the hard way at the start of my business ventures. I used to think of any new client I got as an A one, naturally. I would be delighted with them and threw myself to service them with all my strength and passion, often leaving my existing clients high and dry. Only then to find out that that new client wasn’t really that dedicated to me. I would often get stung, used by the client and left not only with no client but with disappointed existing clients. And this is a situation no business should allow itself to be in.
Which system is the best to use then?
To be honest, now, with all the experiences I have, I would say they both should be used together. If I was to do it again, I would combine them into one. It is good to know the Total Customer Value however it does not reveal other important factors when it comes to working with a client such as ease to work with, their honesty towards you, the price they pay (they may have a high Customer Value, however it might be based on many jobs that are priced very low, as they demand a low price. Ultimately such a client may block your time but the financial reward may not be worth it) and the prospect or promotional factor (with the latter being especially important to a startup business).
Grading customers is a difficult task that needs to be done. It is especially tough at the startup stage when you need any client you can get. However, it is sometimes better to focus on other aspects of running a business rather than a client who is simply not worth your time.
Are you going to be doing that still?
Not really but that’s mainly due to the nature of my new business. Smart Business Guides is not going to be a service company. It will be publishing products and because of that, my situation will be quite the opposite. Instead of grading my clients; my company, its brand, and its products are going to be graded by my clients. I have a post about that coming really soon and I will explain this situation in depth.