A profitable customer generates more profits than the resources used to acquire and maintain their business. Factors such as sales efforts, commissions, and customer service costs must be considered. Salespeople should qualify potential customers to determine profitability. A once profitable customer can become unprofitable due to low business volume or additional costs. Providing quality customer service can be expensive, so it’s important to ensure the returns are worthwhile. Indirect benefits, such as word of mouth promotion, should also be considered.
A profitable customer is any customer for whom the resources used to acquire and maintain his business are outweighed by the profits gained from that business. To determine whether a customer is truly profitable, many different factors must be considered, including the cost of sales efforts, commissions paid on revenue generated by the customer, and the wages, time, and equipment expended to maintain customer service and support. It is possible for a profitable customer to become unprofitable over time, especially in situations where business volume is low and the customer requires more attention.
Many salespeople will consider a customer’s potential profitability before initiating that first contact. This involves qualifying the contact upfront, as a means of developing an idea of what the client needs, the level of revenue that can be generated, and the potential for the client to require more than an average amount of care and services once a year. once the sale is completed. If the expected return over time and resources invested indicates that the vendor will make little or no profit during the life of the relationship, it is likely that the vendor will choose not to initiate the contact and focus on other opportunities.
Even a new customer who becomes a profitable customer can eventually become a financial liability. Most often, this occurs when the customer fails to pay outstanding invoices or makes requests that result in additional costs in providing goods or services to that customer. When a once profitable customer no longer generates at least some sort of return, the supplier must weigh the consequences of separating the relationship versus maintaining it and decide which approach is in the long-term interests of the business.
A large part of the back-end expense of managing a profitable customer is related to providing quality customer service. The supplier must know how to handle customer complaints, relate to customer perceptions about a particular issue, manage customer call centers that allow the customer to obtain information or express concerns at any time, and generally keep that customer happy and promote customer loyalty. Because the best customer service efforts can cost a lot, it’s important to make sure that the returns from customers who make use of those resources are enough to make the effort worthwhile.
While it’s relatively easy to determine how much monetary return a customer generates, it’s sometimes more difficult to measure the indirect benefits you get from the relationship. For example, while the customer may not be generating a large amount of revenue from their orders, they proactively promote the supplier and product line to other types of customers who use similar products. As a result of that promotion, those businesses eventually become customers and generate additional revenue. In the event of a break in the relationship, the supplier loses valuable word of mouth which can significantly slow down sales growth.
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