Measure customer base to survive crisis

By Edgar Ortiz

For the AJC

Being able to measure customer profitability is an essential and fundamental requirement to achieve business success. Without it, it is like navigating without a compass.

Consequently, you may or may not get to your destination. Obviously, this is not a smart way to travel. Unfortunately, many small business owners embark on the entrepreneurship trip, many without a compass and a map. It's not a surprise therefore to know that nearly half of small businesses fail within their first two years.

Profitable businesses have long recognized that some customers are more profitable than others. Being able to identify and distinguish the profitable from the unprofitable ones gives them a competitive advantage. Small business owners can benefit tremendously from the adoption of customer profitability metrics to manage customer relationships, marketing spending and customer service strategies.

As the economy struggles to recover and consumers change their preferences, having the right information about the right customer at the right time is important more than ever.

You can't improve a business if you can't measure what's getting better and what's not. What you don't know about your customers, competitors and the economy can be costly. Hard work and passion, although being important personal attributes, are not a substitute for the information required to manage a profitable business.

The choice is to work harder or work smarter. Instinct and hard work do not guarantee business success. To compete and win in today's economy, it is critical to have the right information to quickly identify and distinguish profitable from unprofitable customers.

Unfortunately, most small and midsize businesses lag in the adoption of customer profitability metrics because of:

Lack of understanding of their benefits.

Unfamiliarity with customer and business performance metrics.

Misconception that large amounts of data are required to implement them.

Facing declining sales brought about by the current economic downturn, small businesses instinctively respond by reducing costs. Lacking information to make an informed decision, marketing programs are generally their first target.

When things are going well, marketing is a revenue generator. When the economy is down, marketing is viewed as a cost and is one of the first functions to be cut or reduced.

Although this decision may reduce costs short term, its long term impact can lead to costly and irreversible financial damage through lost customers, erosion of market share and opportunities offered to competitors.

Metrics are a necessity for small and midsize businesses to successfully compete and win in today's highly competitive economy. Their implementation, however, need not be a major drain on their limited resources.

To deploy them, we typically advise clients to start small with a focus on three strategic areas:

Customer profitability.

Financial performance.

Operations.

The organization can later expand into other areas as demonstrated by the benefits and improvements achieved over time.

Most small and midsize businesses have a solid understanding of the profitability of their products and services. However, very few measure and track customer profitability. Consequently, most are unable to identify and differentiate profitable from unprofitable customers and develop effective strategies to allocate marketing spend and manage service costs to achieve profitable growth.

The lack of customer profitability metrics is a serious and continuous threat to business survival and largely explains why nearly half of small businesses fail within their first two years, as many spend their time and resources reacting to changing market conditions rather than focusing on market growth.

Metrics provide the basis to derive fact-based decisions to improve the effectiveness of marketing, advertising, loyalty and customer service strategies. With metrics, small and medium businesses are better positioned to more effectively respond to rapidly changing market conditions and to avoid costly "instinctual" decisions.