The concept seems counter-intuitive: To reject some customers and put all your efforts into others? Yes—absolutely. Knowing who your core customers are, and then gathering them with targeted strategy, is crucial to the continued success of your business. Let’s first look at the pitfalls caused by failing to identify your ideal customer, and next, we’ll examine the measures a business owner should take to avoid these pitfalls.
You Can’t Please Them All
It all starts when you go into business without knowing exactly what kind of customer is right for you. In the beginning, most businesses have not even considered the fact that it should avoid certain categories of customers, unwittingly shooting itself in the foot by saying “yes” to everyone. They are all paying your asking price and filling the coffer, but there is a hitch: Different kinds of customers have different needs, which is which is why you may end up spending far more than you planned. Wrapped up in the excitement of turning a consistent profit, many business owners send out their sales team to bring in one-time buyers, long-term, loyal clients, and even difficult buyers always requesting custom specifications. This could seal your fate because the cost attached to each customer can vary wildly, depending on their needs and what it will take to serve those needs.
When Damage Control Becomes Disaster Relief
In an extensive article published by MIT Sloan Management Review, researchers carefully examined this phenomenon and also revealed findings of a case study involving a small business which suffered this very problem. What they found is that when a company reaches a “critical size”, “costs often accelerate faster than revenues.” This happens, possibly to the end of being forced out of business, when a company runs through available resources and working capital as it struggles to satisfy the needs all different customers. The researchers also described the fateful next step, which is the tendency of a company to desperately cut prices to reestablish its revenue stream, while the need for resources to satisfy customer orders keeps growing. Investors begin to get nervous, revenue stagnates, and growth stops.
Be Discriminating to Regulate Your Resources
Due to the uneven amount of resources it takes to satisfy one type of order, over another, the cost of serving your customers can quickly end up overrunning revenue. You have a finite amount of available resources, and you’ve worked hard to acquire those resources. The distinction that every business owner should pay very close attention to—even more so in the first years of operation—is what its target customer looks like. Which type are you aiming to attract, or best able to serve? Does your business lend itself to “transaction buyers,” or “relationship buyers” (as defined by MIT’s article)? It is vitally important to design your infrastructure and resource development plan, and put the bulk of your efforts into whichever type of customer you are more equipped to serve. That way, your business will not run out of resources from satisfying orders that you did not plan to fill.
Who is Your Ideal Customer?
Discovering your ideal customer involves looking carefully at who you are most capable of serving. In the best-case scenario, you and your partners would be able to discern who your business’ core customer is, before it’s even up and running, and write into your business plan the structure for serving those customers. That is achievable, but more than likely, you will have to just hit the ground running and find your ideal customer base, on the fly, by watching specific growth in different categories and deciding what brings in the most reliable, consistent profit.
Counting the Cost
Once you know what kind of customers you can fully satisfy and will consistently bring in revenue, the next step is finding out exactly what it costs to serve them and incorporate that into your business plan. That means you will have to look at the cost of manufacturing and distribution, wages of sales representatives, additional costs for custom specifications, and any other cost associated with filling an order for each customer. Each individual cost element will factor into a pointed plan for creating a comprehensive structure that will serve your business, as well as its core customers, as efficiently as possible.
Hopefully, this cautionary information finds you even before you open your doors, but if not, there is always an opportunity to go back, retool, and identify your business’ ideal customer. Once you have that down, your business will be able to operate more smoothly than it ever has.
Once you’ve identified your ideal customers, how do you bring them in? The following post has some further reading on that:
Learn to Attract Your Ideal Customers
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1. Frank V. Cespedes, James P. Dougherty, and Ben S. Skinner III, “How to Identify the
Best Customers for Your Business,” MIT Sloan Management Review, http://sloanreview.mit.edu/article/how-to-identify-the-best-customers-for-your-business/