The Value Of A Customer

Accessing value in a business relationship is subjective—it should not always be simply defined. Value is as much about ancillary costs as it is the revenue from the customer.

One of my colleagues recently asked me who my most important customer was, and I instinctively said “all of them.” Hopefully, you have gotten the message about the importance of loving your customer from reading my column, but there is a different question posed here. What is the actual value of each of your customers? Accessing value in a business relationship is subjective—it should not always be simply defined. Value is as much about ancillary costs as it is the revenue from the customer.

One of the mistakes I see job shops often make is labeling a customer based on their first interaction or the company’s first order. Think about your largest customer. How big was their first order? More often than not, their first order with you was a test to make sure that the entire process ran smoothly, and that they received quality parts at a good price that were delivered in a timely fashion. Once you passed that test, they were willing to give you more of their work, and they were placing larger orders on a monthly basis and not only single part runs.

There are a few ways to look at the value of a customer. It’s not a number because what figure would you place on a happy customer? Forgetting about their size and how much business they do with you per month, happy customers can provide many positive attributes. First, they are exactly the type of customer you want to use for references. They can talk in glowing terms about how you have worked well together, and they can help answer questions from a customer standpoint, so your prospect doesn’t feel like they are getting a sales pitch. Second, if they understand the process of how your shop works and are not tying you up on the phone or on e-mail, that value is found in freeing up your resources to get more work done, get more new customers in the door and have a life outside the shop.

Sometimes there are customers that, while variably profitable for your business, are simply too difficult to keep. They may cause your business to spend unaccountable, but significant resources on them, indirectly cutting into profits and negatively affecting the overall efficiencies of the business to serve other clients. In that case, navigating away from a “low-value customer” by nurturing new business may be in order.

Another way to measure a customer’s value is based on potential. All good customers have potential, but customers inside an OEM have more value based on the “open door” theory. Once you get your foot in the door at a large company, and prove yourself, it makes it easier to get noticed by others in the company. If you are working with a buyer for screw machine parts, you can take a reasonable guess that they need someone for milling, turned parts and other processes based on the customer. These new opportunities raise the value of this customer and increase your margin because your time is spent on one customer, instead of cold calling others.

The final way to look at value is by answering the question: “What would it mean to lose a customer?” Understanding the loss in revenue is easy, but what else are you losing? Does this customer give you access into an industry that you otherwise are not involved? Is the customer simply too demanding of your time and resources? When you look past size and revenue and get to the real costs in time and money, you then have to make the decision of what it would take to bring a customer back, and how many of them are worth that time and effort.

It is a good idea for machine shop owners to better understand what the true value of their customers are. By focusing on the dollars and resources consumed and not only revenue, it will be easier to determine value and help build your shop with the type of customers that you want for the long term.

Mitch Free is president and CEO of MFG.com, Atlanta, Georgia.