Not all customers are valuable to your business. At some point in your career you’ve probably found yourself saying, “There’s nothing we can do to make them happy.” And you found yourself spending countless company resources to please a customer that could not be pleased.
The way you measure a customer’s true value to your business is to grade them.
Grading components
So, what factors should you consider when grading customers? Here are my recommendations:
1. Payment terms Have you heard the term “fifth third proxy?” If you haven’t, get familiar with these payment terms because more customers are asking for it.
If you agree to these terms, your customer will pay you on the fifth day of the third month after they receive your invoice. On average, expect to get payment about 110 days after date of invoice.
I’m not willing to wait 110 days for payment and neither should you.
2. The Golden Rule When we were young, we heard it over and over from mom and dad: “Treat others the way you wish to be treated.” Well, the Golden Rule should apply to your customers.
Because they pay you money, some customers will yell, use obscenities and even threaten you. If you live your life by the Golden Rule, then you deserve to be treated with the same dignity and respect that you give to others.
3. Gross margin For each and every one of your customers, know your target margin.
If you are unable to achieve your target margin due to mistakes you are making as an organization, then correct those mistakes. If you are unable to achieve your target margin because the customer is unwilling to pay the price point that will enable you to, then you should consider dropping that customer.
Margin is what enables you to successfully deliver the product or service the customer requires.
4. High maintenance If a customer is high maintenance, chances are that you are allocating too many resources to that particular customer and neglecting others. High-maintenance customers are demanding; some are worth it and some are not.
Getting started
Create a scoring matrix. (I recommend using A, B, C and D similar to a school grading system.)
Know your Mendoza Line. For example, “if a customer scores two Ds or more in any of the rating categories we drop them as a customer.”
You want to grade a customer annually, about 90 to 120 days prior to the renewal of a contract or purchase order.
Before committing to grading your customers, you must have the courage to drop customers if they fall below your Mendoza Line. If you don’t, then the process of grading is a waste of time.
Remember, “If you can measure it, you can manage it.” The value a customer brings to your business is measurable.
