As pricing practitioners, we tend to focus so much on prices that it’s tempting to forget that other factors can have a huge impact on profitability. After all, the basic equation is pretty simple:
Price – Cost = Profits
It seems obvious that if we want to increase our profits, we need to either decrease our costs or increase our prices and preferably both.
But what if there were a fairly easy way to increase profits without increasing your prices or lowering costs?
Sound too good to be true? Don’t worry, this post isn’t about to become an infomercial. We’re talking about managing your customer mix.
In any B2B company, certain customers are inherently more profitable. They buy high-margin products and they buy them more often than your other customers. At the other end of the spectrum are your least profitable customers—the ones who only buy products with very thin margins and those who don’t make purchases very often.
Wouldn’t you like to have more of these very profitable customers and fewer of the least profitable kind? Of course you would!
So how do you go about swapping less profitable customers for more profitable customers? The process starts with identifying which are your most profitable customers. You don’t need really detailed data here, but you do need enough accurate information to be able to group your customers into quartiles or quintiles based on which are the most profitable.
Next, you’re going to look for similarities among the customers in the top quartile or quintile. Maybe many of them are in a similar industry. Maybe they are a particular size or are located in a certain area. Maybe they are former customers of a particular competitor or maybe they all have a similar sales process with their own customers. You might have to do some digging here, but you should be able to identify some meaningful traits that correlate with higher profitability.
Once you have this information, share it with management as well as your sales and marketing folks. When they see the potential of targeting these particular customers, in most cases, they will automatically tweak their activities to go after more of the kind of business that is the most profitable for your organization.
Of course, there are some additional considerations and some things to watch out for. To learn more about how this process works, including a case study about how customer mix impacted one technology vendor’s pricing performance, check out the tutorial Manage Your Customer Mix to Improve Profits.
Like all worthwhile endeavors, managing your customer mix is going to take some time and effort. However, if you do put in the time, you’ll find another powerful way to impact profitability without increasing prices or decreasing costs.
Manage Your Customer Mix to Improve Profits
It's natural to assume that you need to raise your prices or lower your costs to improve gross margins. But there's another powerful variable in the equation that can help grow profits.
