Make More Money By Segmenting Your Customers
Several years ago I was talking to a Senior Vice President at a major bank. This guy had been in the business for 30 years and was one of the more successful professionals I’ve worked with; he made a lot of money yet never seemed overworked. When I asked him how it did it, he responded with a single word: segmentation.
In any service business, the most important thing is to segment your clients into two broad groups: those that are making you the most money, and those that are not.
It’s an application of the Pareto Principle. Eighty percent of your revenues often come from the top twenty percent of clients – the key is to a) identify the top twenty percent and b) invest as much as you can into those relationships. Sure, you might miss a few smaller opportunities, but you’ll save an enormous amount of time and energy.
The Senior Vice President I worked for broke his clients down into three specific categories. For each category, he outlined roughly how much money he’d make per year, and specific things he would do to keep up the relationship with each group. Here’s an excerpt:
There are a few non-obvious things going on here:
First of all, the Vice President is willing to provide lesser service to lower-value clients. This is because he knows the value of his time and resources, and understands that these clients aren’t profitable unless he spends minimal time maintaining them. This allows him to free up more time on retaining the affluent and high-net-worth client base. He’s not afraid to lose a few lower-tier clients if it helps him keep the real source of profits.
That being said, the Vice President knows that there are certain minimums required to keep any client happy. For the lower tiers, an annual call and a birthday card is better service than they will receive elsewhere. This way, he can maintain a few thousand dollars in annual revenue with a few hours of his time and the cost of mailing out a card.
This is just a general guide. The Vice President doesn’t stick to this rigidly. Instead, he evaluates each situation on a case-by-case basis and makes adjustments accordingly. But it gives him a great default position and helps him manage his time more effectively.
A Final Note: The art of segmentation isn’t just important in business. We are constantly meeting new people; if we tried to keep in touch with every single one, we’d never get anything done. Instead, segment your contacts into groups. Personally, I segment people into three categories:
Business Contacts: these are the people who can help me in my business endeavors. I tend to make responding to these contacts my top priority. Most business is time-sensitive, and being timely cultivates a very positive image.
Close personal friends/family: I will always make time for these people, but I usually can delay my responses a little bit if I am on overload. I will also make sure to reach out to these people from time to time in order to keep the relationship strong.
Everyone Else: This is the segment that most people fall into, and they are also the last priority. If I get to them, great, but it won’t be at the expense of my more important relationships.
This segmentation helps me focus on building and strengthening the relationships that matter most to me, while still leaving me enough time to be productive in other areas.
Have you ever used segmentation to help you grow your profitability? Did it work?