HOW to build and sustain the “quality” of customers and other resources (29)

Kim Warren Author

3 options: win better customers; lose less-valuable customers; build sales to customers you already have

A recent post explained how the “quality” of business resources (customers, products, staff, capacity, intermediaries …) is just as important to performance as the quantity of each.

What I did not explain is HOW to manage that quality. To get your head around this, think about an analogy – you want a warmer bath – and then how that relates to improving the average quality of your customers (expressed as sales per customer).

You have 3 options

1. Raise the quality of what you already have … heat up the water already in the bath; grow sales to existing customers.
2. Add higher-quality resource … add hot water to your bath; win bigger customers than you currently have.
3. Lose poor-quality resource … remove cold water from the bath (if that were physically possible!); close down smaller customers.

The average sales per customer is known as an “attribute” of the customer base. Other attributes may be their average profitability; their average cost-to-serve, and so on.

Visualise how customer quality changes … Think of the number of Customers in one ‘tank’, with customers won each period filling that tank, and customers lost each period draining it.

… and think of the Total sales those customers generate sitting in a parallel tank. The average customer quality (sales per customer) is Total sales divided by Customers.

Every customer you win brings with them their unique sales-rate; every customer you lose takes their sales rate away with them; every existing customer who buys more adds those sales to the total. Because each customer carries their size-attribute with them when they are won or lost, the structure is known as a “co-flow”.

Other resource-attributes too.

The same analogy and structure works for attributes of other resources:

• Raise the average experience of staff (years per person)
• Raise the average appeal of products (customers-reached per product)
• Raise the average efficiency of production capacity (output per machine per period)
• Raise the average reach of dealers, stores etc (end-customers reached per dealer or store)

… and any resource may have more than one important attribute. For example – each of a bank’s loans has an amount-borrowed, an applicable interest-rate, a risk of default, and a remaining-term.

The methodology for actually modeling how resource-quality changes over time is a little tricky, but is fully explained in our extension-class 5.

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Categories: : business performance