What makes a particular sale or customer more valuable than others? Obviously, the number one thing to consider is profit. The best customers are the ones who are eager to buy, and to spend a lot with you— particularly on your most profitable products/services. Even better, they’re loyal to you and they keep coming back, with very little coaxing.
Identifying your most valuable sales will help you run a more profitable business. This is especially true with businesses that are established and have a large enough customer base to be picky about who they serve, because…well, because they can afford to pick and choose. And isn’t that the ideal place to be for a business?
You can tailor your business to better serve your best customers. The one trap to watch out for, of course, is becoming too reliant on one customer. Such dependency can be crippling. You can read this post on Resource Dependency to better understand what we mean. The point is, the real strategy here is too focus on serving a particular type of customer, rather than building your business around one specific customer.
Ways to measure a sale’s value
The simplest way to look at it is with Cost-Per-Lead (CPL) and Cost-Per-Sale (CPS) compared to Sales Total. Obviously, profits=total sales minus operating expenses. Well, we can boil that down to a simple formula that helps us understand the true monetary value of each sale and/or customer, by simply replacing operating expenses with CPS.
You’ll want to track this metric for each sale, each account, and overall. You’ll end up with your average profit per sale, and you’ll easily be able to understand who is above average and who is below average — and even by how much.
CPL is important, too Now, obviously Cost-Per-Lead is included in CPS, because acquiring a sale requires you first acquire a lead. But you also want to track Sale Total minus CPL as its own important category, because this will allow you to accurately pinpoint why your Cost-Per-Sale is what it is.
Example: you might find that high CPS sales are actually low CPL. This could indicate that your least expensive marketing is bringing in leads that require long sales conversations for little reward. You might find that your high CPL leads actually turn out to be your lowest CPL leads. This could be because your most effective marketing is bringing in highly qualified leads, which are eager to buy from you and don’t require long sales conversations.
Two simple questions to ask yourself
1. what are your biggest tickets and biggest accounts?
2. what are your most profitable sales (profit being the difference between CPS and Sales total)
Numbers are a good measure but aren’t everything
There are other things to consider, of course. Here are a few to take a good, hard look at:
1. The value of returning customers
Focus on those how have strong ongoing sales potential. Returning customers have a CPL of effectively zero. Additionally, Word-of-mouth recommendations will bring in highly qualified leads. That reduces your CPL and CPS. So a small account with a loyal customer might be highly valuable, especially if that customer is well-connected and can bring you lots of leads.
The best accounts, of course, are those that your business is uniquely capable of providing value to, are relatively low-maintenance, and speak highly of you just for doing what you say you will do and doing it well.
2. Unseen and unforeseen costs of acquiring and maintaining customers.
Some of these costs may be impossible to measure, but should still factor in. You might have a customer who takes up an excessive amount of your sales team’s time. Maybe it’s because they like to talk. Maybe its because they keep asking the same questions over and over. Maybe it’s because they make unreasonable demands.
How much is this costing you? If it adds up to 6 hours of wasted time each month, how many more sales could your team be closing? Another example of this: customers who are low-maintenance at first, but for whatever reason, become high maintenance over time. Maybe they understand that they are your biggest customer, and feel that it ought to give them some sort of control over you.
The 80/20 rule applies
80% percent of your sales comes from 20% of your customers. 80% of your profits comes from 20% of your sales. 80% of your internal headaches come from 20% of your employees, just like 80% of your customer headaches comes from…20% of your customers.
By the numbers, your most valuable sales/customers are those who offer you the greatest difference between total in come and the cost of acquisition and/or maintenance. Just don’t forget that there’s a little more to the picture than the numbers. Customer loyalty is immeasurably valuable, and there’s always costs that are difficult to quantify.
Question: What does measuring your most valuable sales have in common with your exit strategy? Answer: they both pertain to profitability. When it comes time to sell your business, you’ll maximize your payout by being able to demonstrate to buyers/investors the one thing they care most about: profits. That, in turn, will ensure that you get the most profit from the sale of your business.
And until then, increasing profitability just puts more money in your pocket. Everybody wins in the long run. And that’s what Free Vector Advisors is here to do — help you win, whether you’re growing or selling your business. No matter the size of your business or the industry you’re in. No matter how much money you have to bring in outside help. We offer flexible terms. We’ll even take equity in the sale of your business as collateral, because we’re confident we can make that profitable for both of us.
To discuss strategy with a qualified legal and business professional Palm Springs, Pittsburgh, Bozeman or Seattle, you can fill out a contact form, here.