Business Ideas & Updates

Not all customers have equal value to your organisation. The 80/20 rule – that 80 percent of your sales come from the top 20 percent of your customers – applies to most small businesses. Identifying that top 20 percent will allow you to focus your marketing programmes on the customers who REALLY drive your company’s profitability, as well as identifying customers who may simply return so little as to be not worthwhile keeping. But what is a ‘profitable’ customer and how do you identify them?

What is a ‘profitable’ customer?
Let’s just consider first what we are talking about here. It’s not enough to look just at the bottom line and see what a customer has spent with you. That ignores the fact that there were costs in acquiring that customer in the first place, and continuing costs in maintaining the account – everything from dealing with their complaints to taking them to lunch. All these represent costs attributable to that customer and need to be considered against what they spend with you – because these costs can add up to a significant amount, possibly enough to tip the balance and make the customer just too expensive to maintain in some cases. So profitability does not necessarily equal the amount of money a customer gives to your business. In many businesses, smaller sales can be highly profitable, while larger sales can cost the company a lot to administer or deliver, and therefore provide a smaller profit margin. So how do you discover your ‘profitable’ customers?

How to calculate the ‘profitability’ of a customer
Estimating ‘profitability’ consists of calculating the two main cost areas associated with a customer – their acquisition cost and the cost of supporting them ongoing. This need not be too difficult; in fact, it may even prove easier for the smaller firm than the larger. But it probably does require some professional help in assessing all the costs that go towards the acquisition cost and then tracing other expenses associated with retaining a customer. The system doesn’t need to be complex and much of the raw material to trace costs to customers probably already exists in your systems, albeit in forms requiring transformation. For example, customer transaction histories show all orders, returns, and collection efforts and you can use that information to create lookup tables in your database that map activity codes to activity costs.

Putting the information to work
If for every ‘profitable’ customer you could get another one just like them, would you agree that your reward would be greater profits? One of the powerful things about profitability analysis is that it can lead on to looking at the common characteristics and behaviours of your top customers – of profiling them. Do they fit into specific demographic or geographic categories? Do they have certain shared attitudes or values? Do they make their buying decisions in a similar way?

Profiling customers like this will help you develop the most effective marketing programmes to not only extend the value to your company of current high profitability customers, but also to target and attract new ones.

It’s not uncommon in businesses that have a salesperson or a sales team to find the manager complaining about them “not doing enough selling”. Well, what are they doing? Studies show that the salespersons job often involves a lot of things besides getting out there and selling. A study of salespeople in the insurance industry found that the amount of time they spent actually selling during a 40-hour business week was a paltry 6 ½ hours, or less than 20% of their total hours worked. The rest of the time they were filling out paperwork and complying with other administrative requirements.

This situation repeats itself in many other industries. Salespeople are now doing much more than selling and the percentage of their time spent selling is decreasing. If you are concerned that not enough selling is getting done, don’t start by criticising the salesperson. Instead, take a serious look at your sales team’s responsibilities and what you’re asking of them in the way of non-selling activities.

For example, you probably expect them to be accountable for what they are doing with their time, and that’s reasonable. But when you ask them to fill out a complicated sheet every day that outlines where they’ve been, who they’ve seen, what was discussed, what time the meeting started and finished, how much time was spent traveling to and from the meeting – that all takes time, and their time is supposed to be spent with customers and prospects.

Traditionally there’s been a lot of resistance to giving salespeople ‘too much’ independence and freedom. There has been a fear that they’ll waste time and company resources if their chain isn’t kept a bit tight. On top of that there’s the need to capture more and more information about customers so they can be segmented and marketing initiatives developed to appeal to individual segments – and it’s the salesperson who picks up a lot of the customer information that allows this. But it also means they have to spend time writing it up back in the office at some stage.

This is partly why most businesses ask their salespeople to do a lot more than just prospect and sell. They’re expected to assist in developing and managing customer relationships, to write proposals, to design and write promotional material, to gather competitor intelligence, to collect outstanding debts; and then to attend meetings and write more reports to keep head office informed of what they’re doing with their time.

It can be argued that these activities are part of their job as a salesperson since most of them are related, at least in part, to making sales and retaining customers. But that’s not the point. Selling is a skill not everybody possesses, and a good salesperson is someone to be valued, nurtured and set free to use that skill on your behalf rather than saddled with a lot of administrative activities.

So what should a salesperson’s role be restricted to? That will vary from one business to another but let’s suggest three general areas:

• Prospecting – using their experience and field knowledge to identify prospects
• Selling – face-to-face selling to purchasing decision makers
• Relationship building – participating in managing customer relationships, but only as really necessary

If the members of your sales team are focused on these activities, and only these activities, their time will be spent more productively. Each of these areas has a direct relationship to the selling function that will help generate the results salespeople are supposed to achieve. If this isn’t happening, then it’s time to change things.

Start by analysing the non-selling activities now carried out by your sales team. For example, how much time do they spend developing presentations to new clients? These presentations can be done by administrative personnel in the office once the salesperson has briefed them on the content they want in it. How much time do they spend managing customer relationships? It may well be time to investigate a CRM system that could shoulder some of the burden.

Look at every avenue to support your sales team. What’s needed to help them prospect for new business? What would help them spend more time selling? What parts of customer relationship management can be taken up by others in the business or by technology? Look at any option that will increase the time they spend actually selling and decrease the need for them to be involved in non-sales activities.

There does have to be a compromise reached here so as to satisfy the legitimate management need for information on what team are doing and how well they are doing it, but the goal of management should be to minimise the time salespeople spend on this and to adopt practices for such things as meetings and report writing that don’t make significant inroads into their selling time.

Traditionally most measures of a firm’s success was linked to tangible assets, e.g. factories, inventory etc. We now recognise that the nature of competition has changed and there is much more focus on the value creation of tangible assets such as knowledge resources, which rival companies cannot easily comprehend, evaluate, and imitate.

To survive and thrive in the face of increasingly radical discontinuous change, businesses need to rely not only on the data processing capacity of IT, but also on the creativity and innovation of people insides and outside the organisation. Today knowledge has been recognised as one of the most important resources for success of companies’ objectives, and is a critical organisational asset. The knowledge has to be transferred across their network, may it be global, internal or external in order to survive and succeed in a competitive world.

The majority of companies are frustrated by the lack of knowledge sharing in an effective way, despite the vast amount of research to understand the process of knowledge transfer (KT). Executives, middle managers, human resource departments and the employees on the floor are often disillusioned by the lack of information available. Even if the information is available it is often difficult to find, and not at all or only partially acted on. While one division might be very successful in transferring knowledge, another division within the same company and country, and dealing with the same network, fails in passing on their knowledge.

Management literature in the past 10 to 20 years lack general consensus on the definition of knowledge. Michael Polanyi (1967) wrote in The Tacit Dimension, we should start from the fact that 'we can know more than we can tell'. He termed this pre-logical phase of knowing as 'tacit knowledge', compared to explicit knowledge, which can be obtained from manuals and procedures. In his first publication exploring the idea of tacit knowledge Polanyi quotes that tacit knowledge can be passed on only by example by the master to apprentice. In other words, tacit and personal knowledge can be learned only by experience and communicated indirectly, through metaphor and analogy. Schüppel (1996) discusses human oriented knowledge management and technology oriented knowledge management. Human oriented perspective knowledge, the “know-how” requires the transfer to other members in the organisation; on the other hand the technology oriented knowledge requires conditions under which information can be stored, collated, prepared, disseminated, used and updated.

Knowledge sharing within organisations remains a challenge, despite a growing understanding of the process of knowledge transfer. For example, in a survey of 431 US and European companies, only 13% of the respondents believe that their company was good or excellent at transferring knowledge into other parts of the organisation (Ruggles 1998). In another survey conducted of three global Furtune 500 corporations, the subsidiaries reported that the actual knowledge transfer was much lower than head office expected.

Managers must understand how they can create knowledge transfer strategies that make a positive difference to the company’s competitiveness.

Looking for a smart way to grow your small business? Strategic alliances are a good place to begin. The SME entrepreneur who invests in strategic alliances will most likely find it a reliable way of consolidating or improving on their market position. As with all business plans, there are some rules to keep in mind when trying to gain maximum benefit from your strategic alliances.

Communication should be your foremost consideration. While it isn’t necessary that each member of a strategic alliance have exactly the same objectives, each should still be committed to a common outcome. To make sure that you and your business alliance partner share similar goals it is important to be honest from the outset. That is, be frank about what you hope to achieve from the alliance, and what you can provide to make sure your partner’s needs are met.

One of the most common small business mistakes is the failure to clearly articulate the details of an alliance from its inception. The result of this failure can be significant; mismatched goals, insufficient commitment, and an inability to alter the alliance easily at a later stage.

Another tip for strategic alliance building - look for situations that will deliver strong benefits to both alliance members. Only take part in an alliance when you think it will improve your business relationship with the other party overall, not just during the term of the arrangement. Never initiate a strategic business alliance if you think it won’t support your business goals in the short or long term.

Knowledge sharing is also an area that you need to be aware of before establishing a strategic alliance. By mastering the ability to share knowledge effectively, you will smooth your new business partnership considerably. Also, knowledge sharing has important ramifications for your clients – if you can maximise the quality of knowledge that you receive from a business partner, you can then pass this on to your clients to ensure they are increasingly satisfied with your services.

For the SME it is also vital to understand what is involved in the development of a strategic alliance with a larger firm. When dealing with a larger firm, try to establish connections with several of the company’s members. This is important because, in a large firm, it is more likely that if one department is dealing with you, another will be unaware of, or at least unfamiliar with, the alliance.

Imagine what would happen if you had a single contact in a large firm, and that person suddenly left the company or moved to another office – you would lose all the value of the strategic alliance that you had cultivated until that point.

Creativity is key here, too. The nature of many SMEs is that they are specialised in one area or another. That means that your skills and knowledge will be more attractive as a strategic alliance package to a particular type of organisation. So do some research, have a look at your client lists, and try to determine which type of company is most likely to engage in an alliance with your firm. Then think of a new and interesting way in which you could package your firm to that type of company, and go for it!

Keep the big picture in mind. It is true that many small business owners choose alliances to pursue a fairly narrow goal, ensuring that they form a number of alliances and therefore cover the majority of their objectives.

So try and imagine how your current strategic alliance fits into your overall business plan, and tailor it according to how you see your company in the long term. Knowing as much as possible about the likely consequences of one alliance will allow you to prepare properly for future partnerships.

Remember also that not every business alliance is beneficial to a company. Some partnerships may have suited your goals when they commenced, but have since lost relevance. Others may have proved to be too narrow and need to be widened to meet your continuing business needs. In such scenarios, terminating the alliance can be beneficial to your operation in the long term.

Also, strategic alliances need not be the sole determinant of your business success. A small firm is only viable as long as it remains competitive, so try not to rely purely on your business partnerships for profitability and success. Instead, focus on your business’ inherent skills and strengths as well. In this way, you will retain an element of independence, and still remain profitable if your business alliances are not as successful as you might have hoped.

If you are able to grow your small business on your own and play to its strengths, chances are your company will prove more attractive to a prospective business partner anyway. Finding a strategic alliance that is attractive to you is only half of the equation – you also have to ensure that, from a partner’s point of view, your SME is the right one with which to establish a business relationship.