Tool Box
Issue No. 9 - February/March 2003
Apply 80-20
How to categorize your customers
If your business is like many others approximately 80% of your profit on sales comes from 20% of your customers. In this situation it’s vital that you (and your staff) know who your best customers are so you can look after them appropriately. This requires categorisation of your customers.
Proper categorisation is a two-step process. Firstly, review your sales records to identify your top 20% of customers and allocate them a AAA rating; then identify your bottom 20% and allocate them an A rating. The 60% ‘in the middle’ can be allocated a AA rating.
When doing this analysis be sure to focus on contribution to profit rather than turnover. It’s possible that you have customers who spend a lot of money with you but do so only on low profit products or services. It’s also possible that some of your lower turnover customers make a disproportionate contribution to your profit because they buy high profit products or services. By focusing on a customer’s contribution to profit in this first step you will avoid ‘mis-categorising’ them.
The second step is to review those who have been categorised as AA or A and identify those that have the potential to become AAA customers. Customers so identified should be upgraded to the AAA category.
One example of a customer with potential would be a recently acquired customer who is currently buying only a small proportion of their requirements from you but has the potential to buy more as you look after them and win their confidence. Another example is a fledgling business whose needs for your products or services will grow as the business grows.
Once done, the categorisation process should be redone every 12 months or so; things change and you need to be ‘on the ball’ in keeping your categorisations current.
When your initial categorisation has been completed you are in a much better position to focus your customer base marketing resour...
