Ready to meet the new Chief Profitability Officer? OK, then, grab a mirror: you’re it.
No need to have new business cards printed, you’re still the CFO as well. But you now have additional duties in line with the company’s new recession-fighting strategy: use profitable customers to drive corporate value. The concept has been around for some time, but it has acquired a fresh urgency in today’s climate. By pinpointing your profitable customers and looking for more ways to serve them, you may be able to coax new life into the bottom line.
Once those favored customers are defined and divided into homogeneous groups, CFOs will be expected to track their value like any other asset on the balance sheet. By overlaying certain metrics — such as buying needs, cost to serve, and strategic value — management can gain insight into exactly which group of users it should be courting and keeping. It might aim its promotions toward upper-middle-class women, for instance, or younger married males with a fondness for fancy gadgets. It won’t be going after everybody anymore; value-crushing customers, who just buy what’s on sale, won’t get any special attention at all. “In a time of limited resources, management has a desperate need to figure out its priorities,” says Larry Selden. “Now is the time to segment your customers.”
Selden, professor emeritus at Columbia University and co-author of Angel Customers and Demon Customers, contends that the bottom 20 percent of customers can drain profits by at least 80 percent, while the top 20 percent can generate 150 percent of a company’s profit. So why not study that upper crust, delicately breaking it into subsegments that share the same needs? Categorizing customers by demographics or geography or product purchases, as many companies do, doesn’t give managers a clue as to where the high-opportunity needs are lurking.
In the long run, precision targeting will generate profits far in excess of any incremental cost. Unfortunately, that won’t be the case in the near term, because such intensive analysis is time-consuming and expensive. Furthermore, there are likely to be expenses associated with reorganizing operations and training front-line employees in how to look at the data so that they know, right on the spot, that the customer in front of them would be receptive about an extended warranty. As much as spending money on the analysis may irk CFOs, Selden reasons that “now is the time to do it. Expectations on earnings are low, so in the short term it’s not going to make much difference if you spend the money on customer segmentation.”
That’s probably a much more engaging task than what most CFOs have their staffs doing now — monitoring the cash cycle and modeling what-if scenarios to make sure there’s enough working capital on hand. That can be pretty routine work. If days sales outstanding is stretching out — the average DSO increased from 39.7 to 41 between 2006 and 2007, according to consulting firm REL — it’s time to sic corporate counsel on the worst offenders. If your revenue model presumes that 10 percent of customers will pay late, it’s crucial to work the spreadsheet, updating projections to account for the fact that that number may be inching toward 20 percent. But to move the company beyond mere survival, what they should do, says Selden, is “change the company from being product-centric to being customer-centric. In an economy where there are real cost constraints, you can’t serve everybody to the same degree.”