Valuing the Cost of Customer Relationships

The costs of acquiring and retaining customers can be astronomical. We know the costs of attracting and maintaining customer relationships in salaries, commissions and proposals, but oftentimes businesses fail to see the cost of maintaining relationships. This includes low margin business, broader staff time commitments, disproportionate use of organizational energy or complexities that arise in keeping customers satisfied and happy. The best-performing companies regularly review the contributions of customers to their bottom line. In some cases, businesses find the need to take corrective negotiation steps; others may decide that the best step is to terminate the relationship altogether.

One way to evaluate customer value to your business is to assign profitability to each customer or customer group. Sometimes a company’s accounting or business system will track customer purchases and associate the cost data to a specific customer or customer groups. Other times, a company will manually need to allocate cost data to customers or certain customer groups. Businesses that fail this basic level of gross margin reporting will lack the data for establishing a strategic and profitable future.

Identifiable costs are easy to associate with each customer’s value; however, don’t forget to include indirect costs. Consider whether these costs are more attributable to certain products or customers and allocate them as such. These may include marketing, servicing, handling or even billing costs that can substantially affect the customer’s profitability to your company.  Engage your employees in managing these indirect budgets, they will know the what or the who that’s driving these costs.

Once profitability levels for each customer have been determined, sort these customers in groups by level. The first group should be extremely profitable customers that you’d like to expand or sell more products or services. The second group are customers who may not be highly profitable but still contribute to your bottom line. The last group is customers that are hurting your profitability. These customers may be engaging in only low margin products, are overly difficult for your employees, constantly stretching payment cycles or requiring extra servicing without extra fee.

Once the groups are set, aim to maximize your relationships with the customers in the first group. Take the time to learn their business and identify other opportunities that could generate more revenue for your business from these customers. Obtaining a beneficial understanding of this group could not only build a better relationship with these customers but also assist with targeting similar customers to those in this group.

For customers in the second group, consider what can you do to elevate them to the first group. You may be able to make that shift with the right combination of marketing and product resources. Pinpoint what these customers have in common with the first group and focus your efforts on maximizing their profitability.

Finally, determine whether the customers in the last group are a good fit for your company. Maybe these customers are tied to customers in the first group and it’s necessary for your company to continue servicing them. Maybe you can strategize on ways that might bring them into the first or second group. In many cases, a number of these customers can be elevated up simply by confronting the problems. For those who can’t be elevated, it may be time to consider terminating the relationship.

It may sound foolish to intentionally let go of customers you worked hard to bring in the fold; however, by dismissing these customers, you’ll free the capacity to focus on your top-tiered customers or pursue more profitable relationships. You are also likely to raise employee morale and your own personal satisfaction by establishing a culture of building mutually beneficial customer relationships.

About the Authors

James M. Bowen
James M. Bowen
Partner, Taxation Services


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