Let’s get straight to the point : All customers aren’t created equal.
Revenue doesn’t necessarily equal value. And what I mean by that is that just because one customer is bringing in the same amount of revenue as another, doesn’t mean they should be valued the same.
In his bestselling book Killer Customers, Larry Selden states that “20 percent of company’s customers (by profitability) typically generate more than 120 percent of the company’s profits, while the bottom 20 percent of customers (your “killer customers”) typically generate losses equaling more than 100 percent of the profits”.
How can this be possible?
Years of observation and study have revealed that your killer customers are unprofitable either because your company cannot find a way to serve them profitably or because they exhibit abusive customer behavior, seeking ways to cheat your company. The latter ranges from things like making excessive returns and perpetually late payments to tying up staff for incredibly long periods and even outright deception.
Regardless of what type of business you’re in, you need to ask yourself, “Who are these killer customers?” and “How can I identify them?”.
To best illustrate who these profit-killers can be, let’s take a look at five of our favorite killers from the HBO original series Game of Thrones.
Just a head’s up — one of these killers is not like the others!
Killer Customer #1: King Joffrey Baratheon aka “The Chosen One”
King Joffrey makes Kim Jong Un look like a saint. Since his rise to the throne, he has mercilessly abused his power and privilege at the expense of his people.
Be very wary of customers who show disregard for your initial terms and believe that they own the relationship just because they’re paying you.
Killer Customer #2: Petyr Bailesh aka “The Loyal Betrayer”
At the end of Season 1, Peter betrays Ned Stark and delivers him to the new King Joffrey, who beheads him for treason. He also managed to engineer Joffrey’s death, implicating Tyrion while evading suspicion himself, and secretly whisk Sansa away.
Some customers may seem devoutly loyal but are secretly planning to or are already doing business with direct competitors.
Killer Customer #3: Melisandre aka “The Master Manipulator”
A sorceress with great beauty, Melisandre serves the enigmatic Lord of Light and wields quite an array dubious magical powers. If she’s not busy manipulating the hapless would-be king Stannis Baratheon and isolating him from members of his court, then you can find her setting non-believer ablaze or enacting bizarre sexual ceremonies.
Beware of customers who have misaligned incentives, whose goals don’t jive with your own, and those who woo you with false promises that get what they want.
Killer Customer #4: Ramsay Bolton aka “The Daddy’s Boy”
Ramsay’s father Roose is thoroughly disappointed with his compulsive and violent behavior. Roose encourages Ramsay to incorporate his creed of “a peaceful land, a quiet people” into his own, if Ramsay ever hopes to rule. Ramsay seems to go at lengths to do anything that will win his father’s respect and although he’s particularly good at thinking on his feet, he’s much less savvy when it comes to long-term consequences and intricate politics.
Many times a company’s “heir to the throne” can reverse the verbal agreements or sabotage the existing commitments you established with their predecessor.
Killer Customer #5: Arya Stark aka “The Rising Star”
Nine years old at the start of A Game of Thrones, Arya is a spirited girl interested in fighting and exploration. Unlike her older sister Sansa, Arya has no interest in pursuing the role of a traditional noblewoman and instead wants to learn how to wield a sword with the best of them. Throughout her travels Arya shows promise of a great leader with her frequent displays of resourcefulness and unflinching ability to accept harsh conditions, but she also gets herself into quite a bit trouble along the way.
Arya represents customers who may be too early in their lifecycle or too small to be profitable today, but who may still have potential in the long run. Unlike the others we have listed, you might want to keep them as a customer if you’re betting that they’ll stick around for the long-run.
like Jay-Z and Kanye Said: Watch the Throne
The first step to watching your throne and increasing your profitability is to stop thinking about your company as group of products and services and instead start thinking about it as a portfolio of customers.
Figure out how to protect and maintain the top 20 percent of customers who are the core of your company’s profitability and you can kill your competition. However, if you don’t deal with the bottom 20 percent of customers, they’ll eventually kill you. You have to look at it like an Asset Portfolio Manager – keep your winners up and cull your losers as best possible. That is the ‘Watch the Throne’ strategy. Culling your losers may have a top line downside, but the operation efficiency, goodwill with your employees, increased output and productivity gains that come from reallocating wasted efforts to productive efforts could flip your P&L over time and drastically increase your profit margin.
Porfolio Management 101
Let’s do some quick math – if your company earns $10 million in revenue with a 10% net profit margin – that equates to $1 million in tangible profits. This is what a ‘Killer Customer’ portfolio might look like. But what if you earned $3 million in revenue and had a net profit margin of 33% . This is what the ‘Watch the Throne’ customer portfolio might look like. This would equate to $1 million in tangible profits. So which is better – $10 million in revenue at 10% (with the ‘Killer Customer’ portfolio) or $3 million in revenue (with the ‘Watch the Throne’ Portfolio) at 33%? They both equal the same $1 million tangible profit figure.
You have to make that decision for your business…but remember this phrase – ‘Return Free Risk’. You don’t want that – and that is what the ‘Killer Customer’ portfolio is chock full of. In our world it’s hard to take the attention away from the top line and focus it on the bottom line, as generally this isn’t ‘sexy’. But one could argue that allowing the focus of your business to be on those ‘Killer customer’ portfolios could have you ending up like some of our characters above – dead (or at the minimum dismembered).
Best of luck – they don’t call them ‘Killer Customers’ for nothing!