What are your customers costing you?

If you operate a merchant business and have bold ambitions for growth, it may be tempting to want to bring in as many new customers as possible.

But it’s important to understand which customers are good, and which could be costing you more than they’re worth. In current conditions, finding customers isn’t the issue, as demand is outstripping supply. But which are the right customers?

When thinking about customers, it’s easy to think about their value to your business in terms of the orders they place. Simple, right? But how much time is spent processing those orders? How often do they buy from you? And when are they paying their bills?

In current conditions, finding customers isn’t the issue, as demand is outstripping supply. But which are the right customers?

The administrative infrastructure of supporting customers is a costly business, so it pays to know which customers are worth hanging onto, and which you might be better off waving goodbye to.

Here are a few things to look out for.

Late payments

A fairly obvious point perhaps, but if a customer is consistently late in paying, or misses payments altogether, are they worth holding onto? How much time is being spent chasing payments? If you are in effect subsidising them, then make sure the value of their custom outweighs the cost of serving them in the first place.

Time vs value

There’s always one, isn’t there? That customer who wants things done slightly differently, who can’t order from the list, who changes things last minute or complicates the delivery schedule every time. Watch out for these, because the time it takes your staff to serve them and fulfil those orders could be disproportionate to the value of the orders.

Of course, there will be customers whose business is absolutely worth the trouble of customised service and last minute changes, but if they aren’t ordering much, or often, then is it worth your while meeting every expectation?

Service levels

Most merchant businesses rely on their reputation for repeat business and recommendations. So if you’re taking on more customers than you can reliably and excellently service, you might be better off turning some away. Compromising your service levels and letting regular customers down to meet the needs of new ones may not be in your longer-term best interests, so weigh up carefully the capacity you have, both in terms of staff and stock, to meet (and ideally surpass) expectation.

Frequency and value

High value, high frequency customers are naturally the ideal, but they’re not all going to fall into that sector. It’s worth evaluating how many customers fall into the low value, low frequency box, and then start looking at how much time those orders are taking. The problem with high frequency, low value orders is that they take up time but don’t add a lot of value – so it pays to know where your customers sit.

Once you understand the make-up of your customer base, you can actively target, reward or incentivise other customers to move into that section of the grid – how can you encourage customers to order more at once, rather than placing several small orders? Or how could your logistics system make delivery more efficient to meet the needs of those high frequency, low value orders?

Flash in the pan or long term loyalty?

While a huge influx of new customers might be exciting, it’s worth remembering those loyal customers who have stuck with you for years. When the chips are down, having their loyalty rewarded with prioritised availability and service could be invaluable in the long term. You don’t know how long a new customer might be with you for – perhaps it’s an opportunistic purchase in a time of limited supply and unstable prices. But being a reliable supplier to your most loyal customers remains vital for your reputation and for positive word of mouth.

Remember, if you’re losing an old customer for every new one you gain – who really benefits, and what is the cost in the long term?

Knowledge is power

At the root of all these things is information. Understanding exactly what’s happening in your business and how to take an active role in moving it from one place to another is vital. Use the software analytics within your ERP system to properly understand your customers’ buying habits, logistics needs and payment habits, so you can always make the best decisions based on the right information.

Do you know who your ideal customer is? Are they trade or domestic? Their preferred buying habits, order size and frequency? It really helps to define your target market so you can tailor your marketing to attract the right people and focus on the right accounts.

Then it’s up to you to drive efficiencies to meet customer expectation – using a better stock system to serve more customers more quickly, enhancing logistics for greater efficiency and cost savings, monitoring pricing to remain profitable through fluctuating cost prices and so on. But if you don’t have the information in the first place, that’s all very hard to do well – so as they say, knowledge is power, and knowing how to use that knowledge is absolutely priceless.