A frequently asked question is “Who is your ideal customer?”. This question is most often asked to solicit information on the characteristics of the customer who does or will make purchases from you. Those market and “personal” characteristics are key to knowing where and how to direct your marketing dollars to the best effect.
There is another answer which can make a significant difference in revenues, profitability, and cash flow. The characteristics of an “ideal” customer need to take into consideration how the business relationship will occur. For instance, one organization may have a culture of rapid learning and adaptability; another may be entrenched in the “we’ve always done it this way” mentality. Some customers will expect “freebies” and “no charge” extras and pay late with “discounts”. Other customers will understand the equality of the relationship and pay on time (or even early!) and in full.
The ability to distinguish a truly “ideal” customer will come with experience. As the business gains experience, a formula or instinct for knowing which customers to accept and which to reject will improve the quality of revenues, the level of profits, and the amount of cash on hand. Many businesses find that, as the selection and acceptance criteria for customers and individual customer projects evolve, the bottom-line grows disproportionately with revenues – making a higher percentage of profit!
Your first assumption may be that you are increasing price. You aren’t. You are reducing costs of doing business by reducing or eliminating the carrying cost of customers whom you have been financing. When customers are late in paying, don’t pay in full, expect “extras and freebies”, complain about “nickels and dimes” because you invoice for the time or product actually used, or cause any number of other unrecoverable expenses, you are financing their business.
Are you an “ideal” customer? With the tremendous pressures that individuals and businesses are under to pay bills, make money, “succeed”, there are times that each of us is less than “ideal” in behavior and attitude. Looking for value, quality, and equality of the exchange of money for product, service, or technology is being a good customer, providing that is being a good vendor. Seeking to gain advantage and “win” implies someone must lose, so that is a less than “ideal” outcome.
Some relationships are especially vulnerable to one side or another taking advantage. Lawyers, doctors, accountants, and other service providers do not have the option of recovering the “product” from a client. Delivery and consumption are synonymous. Franchisors that provide franchisees with the systems, processes, experience, and procedures do so with the expectation that both sides will honor the agreement and are forming a lasting relationship – to benefit both sides. Here are other instances where the “ideal” falls short:
- a franchisee breaks the agreement and takes the knowledge to compete against the franchisor
- an original equipment manufacturer provides equipment to a distributor or reseller who fails to support the product after the sale to the end user
The customer relationship can and does take many forms. The quality of the customer and the cost of doing business with some customers is far greater than the cost of the product sold. These are other costs of a customer:
- length of credit terms
- uncertainty of collection
- probability of disputed charges
- service level
The value of a customer includes
- gross margin
- longevity of relationship
- referral potential
- frequency of purchases
- payment history
Whether you are the customer or the vendor, understand that an “ideal” is a theoretical objective. The reality of business is that relationships will vary over time, but avoiding and eliminating doing business with those who exact a higher price can significantly improve your perspective and bottom-line.
Copyright ©2006 FOCUS Resource, Inc.