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Tuesday, January 08, 2008

Maxims: Lose the Devils and keep the Angels.

Anybody who’s read my maxims for any length of time knows that I am a fundamentalist on pricing and abusive customer relationships. Maxims that recommend leaving the unprofitable customers for the competitors are among them. I have an ally who has actually created a business theory around these concepts: Larry Selden of Columbia University’s Graduate School of Business. What professor Selden found was there is a direct correlation between a company’s stock price and its ability to develop a profitable customer portfolio (like … duh … isn’t this basic business theory that stock valuations are related to profits?). More importantly, he has developed a theory that a company should break its customer base up into quintiles based on their profitability. The top 20%, the angels, are to be developed; the middle 60% held; and the bottom 20%, the devils, dropped. He has another view that is interesting as well: a company should not view itself as a portfolio of products, but as a portfolio of customers. Now you’re probably thinking this is not new and it isn’t. Applied has successfully executed on this strategy for decades. What is new is that it is codified at the university level and it is a nicely packaged set of ideas.

You can charge for anything.

Always charge for anything that adds value. Even, if you find yourself with a customer who finds value in excessive negotiation, CHARGE THEM. They may want to exercise their legal department, but why should you run up legal fees at the expense of other customers who are less of a headache to keep happy. It will also force them to reevaluate the cost-benefit ratio of excessive negotiation. Few legal departments see their contracts as a feature-benefit. But it is! Whenever the customer wants something custom it is normally charged for. So why not charge extra for a custom contract? They pay for it anyway, because companies with excessive contracts/negotiation invariably pay more for their tools. If they really want your product because you have differentiated it they will buy anyway or go somewhere else to find an easier victim to play with. If you haven’t differentiated your product get down to the basics: price and delivery – and get on with it efficiently.



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