When business confidence suffers and shareholders are nervous about the volatile economic and political climate, executives in large complex companies typically focus on a few key levers to manage risks in the face of such uncertainty. The need to protect operating profit and preserve cash, when the top line revenue is under pressure, leads to a focus on SG&A (sales, general and administrative costs), and sometimes an examination and rationalisation of the company’s portfolio to preserve gross margin. Executives often react by taking immediate cost cutting actions, which result in projects being delayed or stopped, budgets being cut and people, particularly contractors and consultants, being laid off.
A less common reaction is to examine the company’s customer base to decide which customers are contributing the majority of the company’s revenue, profit and growth. But a downturn is the perfect time to review this, because it offers several opportunities to improve financial performance.
Every mature company seems to end up with a long tail of customers who, by accident rather than design, number in their hundreds or thousands but contribute very little to the company’s revenue and are often a drag on net profit as the cost of acquisition and cost to serve these smaller customers can easily outweigh the gross margin they generate.
A worthwhile exercise is to create a detailed understanding of the tiers of customers by size of revenue and ideally gross margin contribution and the churn between tiers for the most important customers over a three to five year period. Our research into large complex technology and professional services companies concluded that, on average, 3.5% of customers generate 50% of a company’s revenue (with almost all businesses in the range of 1% to 5% generating that 50%, as explained in Account-based Growth: Unlocking sustainable value through extraordinary customer focus, Burgess and Shercliff, Kogan Page, 2022). For some of our clients, this is a ‘lightbulb’ moment because it enables them to better focus their sales and marketing resources on the customers that matter and the prospects that could become large customers in the future, rather than trying to maintain thousands of small customers and create prospects who are only ever going to be part of the long tail.
The consequence of this kind of analysis is that it enables the company to double down on treating its most important customers with the significance they deserve: they should have the most talented client directors, insightful, relevant and personalised marketing, premier levels of customer success and service delivery, and active executive sponsorship and engagement.
But crucially, in a downturn it is also an opportunity to cut costs in sales and marketing and possibly customer success without hurting the revenue line significantly and with the prospect of actually improving the operating profit by reducing the long tail of accounts.
So, if you are worried about the current economic climate, as well as taking the more typical cost actions, review your own customer base and think about how to focus on long-term, sustainable, profitable growth from your most important customers.
