Categorizing Customers For Focus
Any company that has been in business for more than a few years and/or has experienced massive growth will find themselves with more customers than they truly manage and understand at a glance. You will wind up with a wide array of customers who will differ in their impact to your business, be it strategically, operationally or financially. You may also unknowingly (or even knowingly) dedicate effort and attention to customers who may not match the goals of your organization.
In order to maximize your time, talent and resources it’s vital that you focus your efforts on the customers that best align with your business objectives, values and goals. This concept has been applied across a variety of organizations, from small companies to large Fortune 500 enterprises.
Your organization will appreciate the focus. It will allow your team to prioritize their efforts without complex processes or decisions. What is most important is to teach and communicate these insights, what to do about them and how each team member should take action. It is a powerful tool build a culture that is aligned with your objectives.
This concept implements easily in a B2B (or B2B2C) model where you are dealing with a limited set of “companies” as customers. It also helps if you already have a number of customer centric metrics you follow. It works equally well for B2C companies just as well. You’ll get maximum value if you’ve already defined customer centric KPIs.
Categorizing’s best return on effort appears after you begin tying categories to strategic objectives. This means moving beyond simple categories such as the size of the customer by revenue.
Category Levels
The first place to start is to determine the number of category levels. Generally speaking this should be 3 or 4. With 2, there are simply too few categories to make meaningful insights or prioritize. More than 4, chances are you’ll drown your organization in complexity. One of the goals here is the ability for the organization to make meaningful decisions quickly.
Another consideration when crafting your categories is to provide a balance. If you have too much revenue or too many clients in your top levels, they becoming meaningless. You can’t have 50% of your clients as your top tier. Likewise if everyone is in the bottom tier you won’t be able to realistically take the needed action. That first step is usually rationalizing each category.
If the first time you categorize your customers you find the categories slightly imbalanced, it is important to adjust your criteria so the categories are useful.
A well balanced category chart after some initial actions will look something like this:
| Category | % of Revenue | % of Customer Base |
| Category 1 | 50% | 20% |
| Category 2 | 30% | 30% |
| Category 3 | 10% | 30% |
| Category 4 | 10% | 20% |
Just remember the first few times you do this you are not likely to have neat %. But if you do it right, it should generally fall into these buckets soon enough.
Category Criteria
The category criteria generally starts with sales revenue and margin centric metrics. Revenue, company size (B2B) or disposable income (B2C) and customer margin. This alone will provide some interesting insights. The first few years I did this in my own business I actually kept it almost this simple and it worked perfectly well. Profitable customers who deliver revenue get the focus, for customers who consumed a lot of time and energy yet but did not generate proportonate revenue, we worked to find a better fit.
However, as my customer list got bigger (hundreds, even thousands in a B2B company) it become more important to find additional factors to consider – at least at the top of the tiers. Keep in mind though that even strategically aligned clients who are unprofitable must be addressed.
As an example, at one point finding a certain type of “brand” to build my company’s portfolio was critical. I was able to get my organization to buy into prioritizing these clients, even if it meant less margin. We did this by providing any reference-able brand above a certain revenue Category 2 status even if they may not met that category’s criteria. Likewise, in order to be a Category 1 client they HAD to be a recognizable brand. We needed them to be the most important because we identified it as vital to the image we wanted to present for the organization.
For most organizations, 3-5 criteria for each category is sufficient. Revenue and margin are likely always be 2 of them. What becomes important is for you make sure your strategic objectives remain paramount to your organization and getting your leadership group to figure out how to prioritize your customer base to achieving those objectives. Tertiary and even secondary strategic objectives are not going to be compelling. Finally for the best results you will often find the strategic objectives only need to be applied for Category 1 and 2 customers.
Projecting New Customers Into A Category
To align your sales organization to the process you will “project” new customers into a category based on their expected value. If you are attracting a new customer with high disposable income and potentially stand to generate a significant amount of revenue, give them the focus of a higher level client even if they haven’t yet generated that revenue.
For a mature organization I would include earned revenue and pipeline when determining category, rather than focusing purely on earned revenue. I found that this helps bring operations and sales together rather than serving different priorities.
The Top Category Has To Mean Something
The clients in the top category have to mean something to the business. They need to be the top of the revenue and profitability heap, but they must also align to the strategic objectives.
An example would be a wireless company where a strategic objectives is to move customers onto new unlimited plans that may produce a higher margin. Generally customers on legacy plans, no matter how strong their revenue, should be able to earn the top category. This will encourage your organization as a whole to focus on converting them to new plans.
Customers in the top category should earn the focus of the organization. Your employees should know these customers and ensure they have the best experience. For every customer to have a great experience, you have to focus leaderships attention on those clients who are most aligned to your organizations goals.
Ongoing Exercise
B2C companies with large and fast moving customer bases should revisit as often as monthly. Larger organizations should revisit quarterly. Generally speaking you should revisit your customer list no less than annually.
The evaluation of where customers land in each category or criteria should be an on going evaluation. This accomplishes a few things for your organization:
- It allows you to continue to evolve your criteria as your business grows (or sometimes shrinks)
- Allows you to take action such as trimming or rationalizing customers in digestible chunks (usually no more than 10% of client base and/or revenue) and trim over time. Focus on the lowest performing customers.
- As your strategic objectives change you can re-align your business accordingly. This becomes very important in pivoting business.
Some Observations From My Experience:
The top customers were rarely the most profitable – In most cases they knew they had pricing power or potential leverage. While in B2C businesses this may not be universally true, it appeared to be a general truth in the B2B world.
The bottom 2 categories often shared the under performing customers – Not a surprise but it helped to see it.
The “emotion” of the culture was hard to change – While the insights give you a very cut and dry view of your customers, including those you need to focus on and those you need to find better fits for – you will find long standing customers still got top level treatment even if they didn’t align to the objectives and categories. Likewise, it was a lot harder for the organization to let go of even under performing customers if they were attached to them.
Getting the company, as a culture, to embrace the need to be more aligned was the real value of the exercise. It wasn’t just for the insights. It was shining the light on the strategic objectives. It helped us illustrate how we as a culture and leadership team we prioritized other things. History and relationships have their place, but it cannot be at the expense of where the organization needs to go.