Segmenting your clients for's as simple as ABC and D!

The 80/20 rule states that 80% of a business's profits come from just 20% of the customer base. 

However, finding that 20% of ‘good' customers is not a simple task.  It's good customer service to react and respond to all customer needs - and going back to the 80/20 split, 80% of business resource is spent focusing attention on 20% of customers.



Unfortunately, the 20% that consume our resources are usually what the business would consider its worst, not best customers - those customers that complain more, and are typically more demanding to work with - those that ‘make the most noise'!  However, unfortunately, this sector are not necessarily the most financially rewarding.

 So how do you find out which clients are returning the best profits and those which are exhausting your resources - and does it matter?

Understanding your customer base and how they impact your business is crucial for the following reasons:

  1. If you are looking to grow your business - the additional resources being expending on demanding yet under profit producing customers could potentially be far better used elsewhere.
  2. A higher level of service could be offered to existing, more profitable customers.
  3. Expenditure could be utilised to attract more clients of the type you want through targeted marketing activities.
  4. Maintaining the same level of service to the existing customers, but cutting costs (by axing the disproportionately expensive clients) to improve profit margins

And last but by no means least....

5)   Improving Staff Morale - demanding customers tend to be those who complain more, and are usually more demanding to work with, they have the potential to be awkward and often do not value what you do highly enough.  Working with them is often a chore, not a pleasure.

Finding the Good Guys

So how do you define a ‘good' customer?  As stated earlier, the Pareto Principle (the name for the 80/20 model) states that 80% of your sales come from 20% of your customers.  And therefore, that 20% of your client base are the ‘good' customers.  Now it may not be exactly 80/20 - in some cases it could be 90/10 and in others 60/40 - but there's definitely a case for doing some analysis and identifying which customers make up your ‘good' client segment.

 In fact, through customer analysis, if you make a list of all your existing and potential customers, broken down into categories based on turnover alone chances are you'll have 3 categories:

  1. A small number of high volume customers.
  2. A large number of medium volume customers.
  3. An even larger number of low volume customers

 However, turnover alone doesn't really help - so to really understand your customer base, I suggest it's as simple as A B C D!

 Client Classifications

 Analyse your customers to see which category they fall into:

 A client's are wonderful;

  •  They value your work
  • Pay on time
  • Don't argue about fees / prices
  • Want a quality service
  • Introduce other good customers
  • They buy often
  • Are friendly and your team enjoy working with them
  • They have potential for growth

 B client's are similar to A's but are missing one of the above characteristics.

 C client's are OK to work with, they pay their fees, but are not especially profitable and will not grow as sources of revenue.

 D client's are those customers who are late payers, argue about fees, are overly demanding of the businesses resources but won't pay for true value of the effort expended on them, unpleasant to work with, etc.

 A's are the cream, B's and C's are the bread and butter, D's are the thorns.

 The Practical Application

Dependent upon the size of your customer base - categorising your customers could take some time.  But it's time well spent.  As a business owner you really should know which of your customers are the most profitable and indeed which are draining your resources.

So here's how to go about it:

  1. Arrange a meeting room and set aside time to run a ‘customers classification workshop' with your team.  Explain the above classifications and ask your team to individually classify each customer into its appropriate category.  Try to keep them focused and not use the time as a general moaning session, their constructive input is vital.
  2. Make sure there is firm agreement on the D's
  3. Discuss how the business should treat it's A clients, B clients and C clients differently.  As a group the team may want to offer different levels of service to each.  Examples you may use in this discussion may include: Airlines - who offer First Class, Business Class, Economy Class, and the internet providers - Gold, Silver and Bronze service levels.
  4. Next discuss how to deal with the D's.  This is often a fun exercise however there are some especially powerful tactics;
    1. Increase your prices to these customers.  In the service sector, doubling or trebling your prices will either drive them away, or the extra fees will move the client up to a C category.  Either way, you win.
    2. If relevant, sell these customers to a competitor.  Explain that you are focusing on a different sector in the market and these clients do not match your target market. A very good way to generate revenue / lump sum.

What next...

Now you've classified your customers - you now have a profile of the A's and B's.  Ask these customers for testimonials and plan your marketing resources to attract more of the type of customers that you want.  Create a Client Selection Criteria - to that when you engage with new clients, ensure you don't go picking up any more draining D's....

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