Customers are the core assets of enterprises, so enterprises must find ways to win customer satisfaction. The more satisfied customers are, the more customers they win, and the stronger the driving force for enterprise development. The reasoning sounds good, but it doesn't seem entirely correct.
Satisfied customers may be good, but profitable customers are more important. How can a company survive without making money? Many Chinese companies are currently facing this dilemma, with profits becoming increasingly thin. In the first half of this year, Beijing's catering industry saw a decline of 88.8% in profits, with profit margins shrinking to 0.37%. This is the catering industry!
Smart customers know how to leverage a company's focus to pursue their own interests. Do you want to sell more products? Let's give it a special offer, providing customized services and more relaxed payment terms. Do you want to win customer satisfaction? Please waive the service fee for this repair and provide some spare parts as a gift, and I will give you a high score.
The new CEO of a Swedish bank conducted a survey and was surprised to find that only 40% of customers created profits for the bank, contributing 250% of the profits. The top 5% of the most profitable customers contributed 150% of the profits. Among the bank's three largest customers, two were the least profitable, and the last 10% of customers caused a loss of 120% of the profits. If the last 10% of customer orders are not accepted, the bank's profit can double.
This case tells us that companies need to choose customers, otherwise they may fall into the trap of losses. It's not that the more customers a company has, the more money it makes.
Choose good customers
Chinese companies like to pursue scale and dream of becoming the world's largest enterprises, but they don't pay much attention to profits. On the one hand, the Chinese people enjoy great success. On the other hand, many enterprises simply cannot figure out how much money each customer and order can earn. We often hear business leaders say they want to 'win this customer at all costs,' but no one asks, 'Why do we have to do business at all costs?'
In the pursuit of market share, sales volume, and customer satisfaction, many companies forget an important bottom line: making profits by selling products and services. Without profits, enterprises cannot develop or even survive.
In recent years, more than half of the customers in the construction machinery industry have been losing money. In order to please customers, the sales department often agrees to various conditions, and behind excessive promises is an increase in customer acquisition costs, because completing sales tasks can earn bonuses, and no one in the company can figure out how to calculate and allocate customer acquisition costs.
Many companies believe that pleasing customers means putting them at the center and following their demands without considering service costs. The larger the business, the more powerful the customer's voice becomes, and the less likely the enterprise is to offend them. They provide customers with additional features and services, but only dare to charge the price of standard products and services.
When exporting construction machinery equipment, companies promise to provide special modifications for overseas customers at standard prices, and also promise timely service and spare parts availability. There are only a few units of this special configuration product in the world, and it is very difficult to plan the inventory of accessories, with a high risk of inventory obsolescence.
If we can calculate the customer acquisition and service costs for these types of customers, we will find that they are causing the company to lose money. Indicators such as customer satisfaction, customer retention, and performance growth only make sense when customer relationships contribute to improving rather than reducing profits. Companies that only focus on pleasing customers have forgotten this.
Previously, products had good profits, and as long as sales were achieved, there was enough profit to cover customer acquisition and service costs, meeting customer needs. After entering the existing market, fierce competition leads to a continuous decline in profits, but companies still use the same methods as before to sell products, promise services and payment terms, and the cost of acquiring customers is difficult to bear.
The method of change is to use Customer Based Accounting, which decomposes the total marketing, distribution, technology, service, and management costs into the cost of serving each customer, accurately calculating each customer's profit contribution and allocating customer acquisition costs.
For example, if the average cost per hour for the customer support department is 300 yuan, and it took 25 hours to complete the warranty service for customer A, then the service cost for that customer would be 7500 yuan. The cost of each service and the discount for each accessory order should be shared among the corresponding customers. The value contributed by a customer is calculated by subtracting the cost of acquiring and providing services from their profit contribution.
Based on customer value, we can evaluate which customers are high-value, which are low value, and which are negative value customers. This is the balanced scorecard method, which not only measures customer profitability, but also includes indicators related to customer value proposition and business results, such as customer purchase amount, profit contribution value, customer satisfaction, and customer lifetime value, as well as customer classification and customer operation strategy.
Customer relationship management based on the balanced scorecard is meaningful because the loyalty of negative customers has no value.
The balanced scorecard has high operability in evaluating customer profitability. If the company finds that an important customer is not profitable, the first step is to discuss how to improve internal processes to reduce service costs, as customers cannot be held responsible for the company's inefficiencies. If the customer's order size shrinks, the company can require them to place orders through electronic channels to reduce order processing costs.
Customized pricing policy is the core of managing customer profitability, and companies can set basic prices for standard products or services, including standard packaging, delivery, and payment processes. The company also provides customers with a menu of options, including customized products or services, special packaging, expedited delivery, or extended credit terms. The price of each option must cover its customization cost so that the company does not suffer losses. Menu prices can also encourage customers to use standard services to reduce costs.
The balanced scorecard helps businesses evaluate customer profitability, such as the ratio of unprofitable customers or the amount of loss in unprofitable customer relationships. This measurement standard provides valuable information, establishes a link between customer success and improved financial performance, and provides a basis for customer operational strategies.
Many companies are unaware of the cost of services and make hasty decisions, agreeing to any conditions due to concerns about losing customers. 'Lifetime free service' is a product of this extensive management approach. If a company cannot convert those negative customers, it should firmly abandon them.
Many companies have experienced the dilemma of revenue growth but declining profits. The balanced scorecard allows businesses to see which customers should be fully retained, which customers should strive to convert, and which customers should be firmly abandoned, focusing on customer operations to achieve profit growth, rather than just sales growth, in order to align performance growth with financial goals.
