Your customer base can make your business either more or less valuable, depending on how well you satisfy their needs. Understanding your client and customer base is crucial for informing your selling decision.
Breaking Down Why Customers Buy
Customers fall into three different categories based on why they buy from you:
- Price consciousness
Are you working to establish brand loyalty, or is your focus elsewhere? Are you constantly replacing clients with new customers because your client retention is lacking? Review your current client base.
If you have great client retention, then ask yourself why. Is it because you have the best customer service, the best product, and the best price? It’s important to know why you do or do not have customer loyalty.
Some customers have no loyalty and will only buy from companies that provide convenience. They want something that is easy and don’t want to go out of their way to purchase products or services. When looking over your business model, determine whether convenience is important to your business or whether it makes more sense to focus on other factors.
Price-conscious buyers make purchases based only on cost. They will travel all over town, going from business to business to get the best price.
Is price a driving factor in your business? If so, you will need to stay current to remain competitive in the marketplace. However, you should also ask yourself whether focusing on this category will provide you with the most value for your business in the long term.
Which type of customer is the most valuable to a business buyer?
You need the brand-loyal client who will drive the price higher when selling your company. Whenever possible, focus on brand loyalty rather than price and convenience when preparing your business for sale.
In addition to evaluating the types of customers, your business has, the buyers also look at which customers make up what percentage of your revenue. It’s typically the 80/20 rule, where 80 percent of your revenue comes from 20 percent of your clients—otherwise known as customer concentration.
This formula is what scares business buyers; if 80 percent of your business comes from 20 percent of your customers, what happens if you lose 5 to 10 percent of your customer base and they don’t get replaced? Customer concentration is the number one issue that will cause a buyer to back out of the sale of your business.
Customer concentration only attracts a competitor or strategic buyer who is looking for a specific client base.
For instance, we sold a $15 million oil manufacturing plant that had all their revenue tied up in one client, BP. Approximately 60 percent of its revenue was connected to BP’s master service agreement. Most buyers wouldn’t purchase this company because they would be fearful of losing BP, thus losing 60-plus percent of the revenue. Over seven hundred buyers looked at the business, and most of them were concerned about the customer concentration.
Due to our large buyer database, we were able to find a strategic buyer who was in the same industry with a similar product. They tried to win over the BP contract for years and couldn’t get their foot in the door. They knew that if they could buy the company and nurture the business’s current relationship with BP, they could finally provide their services. They could then monetize that relationship, which would improve the ROI on the purchase of the new business.
Strategic buyers always look for synergy between employees, clients, databases, and congruent revenues. Most want to take advantage of economies of scale.
Ask yourself: is a sizable percentage of your business tied up in one or two customers? If so, this could be a huge issue for your business and will raise a red flag with prospective buyers. They know that if you lose that one customer, you could be out of business. Buyers will explore your client mix in the due diligence phase and look for a diversified customer base.
Questions to Determine Your Customer Concentration
Replacing customers is one of the most expensive line items in running a business, so it’s important to determine your customer concentration.
To do this, ask yourself these questions:
- How many clients do you lose a year?
- How much money does it cost you to replace a client?
- What percentage of your business comes from referrals?
- Who is your client base?
- Do you have a diversified client base?
- Do you have residential or commercial clients? Wholesale or retail clients?
- What is your company’s relationship with your clients?
- Are your clients loyal to you, your products, and your services?
- What is the demographic makeup of your clients?
- Do you have customer contracts in place, and are they transferable?
Buyers will be concerned if a high percentage of your sales come from only a few customers. However, if those customers are contractually committed to ongoing purchases for a specified timeframe, that concern can be mitigated. Similarly, if those few customers fill a gap or create a new market for the potential buyer, it may not be seen as an opportunity.
Monitor Your Online Presence
Your customer service systems can either be assets or problems. You should have a system in place that monitors your online presence, including online reviews. Any complaints should be addressed quickly, and compliments should be applauded. Customers who become raving fans are your best marketing tools, so do everything you can to cultivate them.
Piecing It Together
By getting to know your customer base, you can take the necessary steps to increase your brand loyalty. This will increase your company’s overall value, which will translate into extra dollars when you sell.
Implement the following:
- Review your customer base.
- Know your customer concentration.
- If you have customer concentration, start diversifying immediately.
- Know your ideal customer.
- Know your customer acquisition cost.
- Innovate to stay relevant and appeal to consumers.
- Market to your targeted customer base.
Learn to obsess about adding value to your customer base and you will find selling success.
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