Improving Your Business: One Profitable Customer at a Time
Part 1 - A Few Good Customers Can Drive Your Growth

Over the last few years there has been increased focus on the strategy of "fewer and deeper" as a strategy for growth. The logic of this strategy is straightforward-focus your resources on a fewer number of customers with whom you can have a deeper relationship and this will cause increased growth. Please note that we are not advocating extreme customer concentration, as this leads to excessive risk and can be a discounter of value when a business looks to sell. In this series of articles, we will address how to improve business results dramatically by gaining a deeper understanding of most profitable customers.

Selecting the Right Customers
In most businesses, a relatively small number of customers generate the bulk of the revenue (typically 20% of customers generate as much as 80% of revenue). One recent client derived 98% of their revenue from only 25% of their customers. This client assumed that the remaining 75% of the clients represent high margin business and thus, a greater share of profitability. Unfortunately, for this client and many similar companies, this usually is not the case. According to a study of retail banking performed by KPMG several years ago, 140 to 170% of profits can come from 20% of customers while 80% of losses can be attributed to only 20% of customers.

Research completed over the past fifteen years by The Mead Consulting Group, with data from over 1900 companies ranging from $4 Million to over $5 Billion in revenue, shows a similar pattern. The Table below illustrates an extreme example. In one company as few as 2% of the customers generated 800% of the profits, while the losses are generated by fewer than 10% of the customers. The balance of the 88% of the customers, remaining in this example, is about breakeven.