Credit Matters Blog

Characterising your customers into different groupings

Kim Radok 14 February 2019

It makes sense to characterise your customers by purchasing power, sales group, type of business, or product and services purchased. The process of characterisation is particularly useful, if it has not been done previously, or you are taking over another business.

On the other hand, characterising your customers can be detrimental to your business when the characterisation is deemed absolute and customers are treated by a perception of their dollar purchasing power, rather than the value to the business. The problem you then have is threefold.

The first problem is the natural reaction that most sales people have when they believe larger dollar purchasing customers must lead to greater sales and profits. On the other hand, the smaller dollar customer is perceived to create more work for fewer sales and profits.

Second, with the first prejudice in place, management often fails to adequately measure the profit dollar per sale earned for each customer. Therefore, they do not attempt to measure the current, or any potential future value of the customer. As a result, insufficient resources are directed to improving the sales and profits from the smaller dollar customers.

Thirdly, management looking for greater returns for dollars spent, keep reducing resources available for sales and credit/accounts receivable. In turn, this lack of resources generally leads to a loss of total sales, whilst efforts are focused on larger dollar purchasing customers and services are reduced to the smaller dollar customers.

Two quick examples from my experiences show how prejudice negatively affected a business.

One very large customer by sales value, made a million dollars in sales in one month for a net profit of $100 dollars. We made nothing because shortly thereafter, they became insolvent.

Sales to another long-established customer with a smaller spend, had dropped 50% on a monthly basis. When questioned about why their sales had decreased so much, they explained it was due to a lack of focus by our management and sales people. This customer always paid promptly every month.

Experience shows when customers are characterised and managed properly, costs can decrease, and potentially, sales and profits increase. On the other hand, if the characterising leads to prejudice and under servicing, sales and profits which may otherwise have been earned are lost.