Of course I don’t mean whale watching – as in off the shores of Cape Cod. I’m talking about the whale curve. In case you’ve never heard of it, this is a way of charting customer profitability. On the vertical axis is cumulative customer profitability. The horizontal axis is percentage of customers ranked from highest to lowest profitability. The chart is in the shape of a whale. Usually, a small percentage of customers make up the bulk of the profits. There are many customers who are marginally profitable or unprofitable. It fits with the classic 80/20 rule.
While customer profitability data can often be hard to get at, it usually provides some interesting and actionable insights. From experience, there are a number of key drivers causing low or unprofitable customers. These can be readily addressed once you understand the root causes. The root causes typically are:
(1) Over-serving smaller customers: Often companies can be under tremendous pressure to grow sales. This can lead to unfocused targeting and the notion that any sale is a good sale. This can result in lots of small customers with lots of extra services and some times deep discounts.
(2) Free-services / missed extra fees: Whether by design or because of sloppy processes, companies can find themselves in the position of not charging for the extras or services it provides. This includes simple things like charging for freight, special handling, payment terms, etc.
(3) Enforcing contracts: In many industries, it’s common for suppliers and purchasers to sign performance based contracts. This simply means that the customer is asked to meet some performance criteria (e.g., purchase a certain amount) in order to earn the promised discount. It is not uncommon for companies to have poor process and sales execution around enforcing customer contracts.
(4) Lack discount policy or process: Uncontrolled discounting can easily lead to unprofitable or low profit customers. This is particularly true for companies under quarter end and year end sales push. Check the average discount levels for deals that are done at the end of the quarter and end of year. It’s not uncommon to find the average quarter and year end discount level to be significantly higher than other periods. This is a sign of desperation pricing.
(5) No segmentation / offering strategy: a segmentation and offering strategy allows the company to vary the offering and target different segments – price sensitive vs. value segments – with different offerings. The core offerings can be the same for each segment. However, the company could striped out all the “extras” for a price sensitive customer for example. Without a clearly defined strategy and plan, its not unusual to see firms offering extras to everyone and then discounting heavily for the price sensitive segment.
There can be other drivers of poor customer profitability. However, these five usually prove fruitful areas to look for price leaks and ways to improve profitability.