The Customer Analysis
Charlie Alter
article courtesy of allbusiness.com 

This is the second of a six-part series of articles on market diversification strategies for US manufacturers of all sizes. The main message of this series is: Your business can grow profitably even in difficult times by finding new markets and new customers.

Market Diversification strategies all have risk associated with them as well as reward. Here's a graphic to describe markets and products and the associated risk and reward:

This article will help you understand a tried and true approach to analyzing your existing customer base to find existing most valuable customers, which will help you find more customers like them in new or existing markets.

One of the first steps is to form a small internal team which is charged with developing your company's plans for market diversification. This could mean any one or all of the following strategies:
  Finding new opportunities with existing or new customers in existing markets;
  Finding new customers in new markets; and/or
  Developing new or improved products & services.

The first step is for your team to begin answering the following six questions:
1. Can you identify the best customers to sell to now and in the future?
2. Do you know which market niches (customer groups) to focus on now and in the future?
3. Do you know what kinds of products and services your best customers want?
4. Can you compare your products to your major competitors' products in terms of price, delivery,
    and key features, model by model?
5. Do you know the specific reasons you are losing orders to competitors for every known lost order
    in the last year?
6. Do you know if you are making adequate margins on each product line, model, of job?

The Customer Analysis
This is the most important task your team can accomplish to begin answering the six questions and to gain insight into developing strategies to find new customers in new and existing market segments.

Begin this process with your team with the following steps:
1. Print a list of all of your customers for the last three years, ranked by total sales
2. Identify the primary products or services they bought from your company
3. Now rate each customer subjectively how your team feels they score in terms of profitability
    (margin factor) and how much effort it takes to keep them happy (hassle factor)
4. Next rate each customer's potential for the future, how your team feels the customer is likely to
    perform: ++ = Growing, -- = Declining
 

Complete the customer analysis with as many of your customers as is practical, but at least with those customers that represent 80% of your total sales over a three year period.  What can your team do with your customer analysis now?

Consider the following suggestions:
1. List all of the customers rating a 1 in margin and hassle. Ask your team to discuss what each of
    these customers have in common, like: size, management structure, location, market segments,
    products or services you sell them, etc.
2. Use this analysis to begin developing an Ideal customer profile, based on your answers from #1
3. Identify the primary NAICS or 8-digit SIC codes for the best customer groups and purchase a list
    from Dunn & Bradstreet or another source to show you who and where more potential customers
    are in these market segments, prioritize this by potential customers that appear to meet your
    ideal customer profile. Use this as the basis for a sales and marketing effort to find more
    customers in existing markets.
4. Use the same NAICS analysis to identify "adjacent" market segments, in other words, look at the
    market segments near the ones you already serve. Is there an opportunity with any of these new
    markets? You'll have to research them to find out.
5. Look at the customers that your team rated 3 in margin and hassle. What can you do to improve
    the profitability and ease of doing business with these customers? The ones with a positive
    potential may warrant the effort to turn them into better performing customers. For the rest,
    consider raising prices and minimizing effort to concentrate on customers with greater potential.