According to Truist research, the most immediate goal for small and middle-market businesses is boosting profitability.1 Focusing on your profitable market segments might be the best way to increase your company’s financial gains.
Looking to boost your company’s profitability? Group your profitable customers or products into market segments and target them for business expansion. Start by defining your segments, flagging them in your financial system, and reporting on their profitability.
Step 1: Group similar customers.
Look over your sales from last year. Identify characteristics your customers have in common. Label them in your customer relationship management (CRM) system, your financial system, or a spreadsheet.
Categories and sub-categories include:
- Type of customer (individual, government, business)
- Business size (revenue, number of employees, income)
- Distribution (online, retail, wholesale)
- Purchase frequency and history
- Demographics (age, gender, ethnicity, lifestyle)
- Source of business (advertising, solicitation, referral)
Create enough categories to differentiate between your customers without making tracking too complicated. Definitions for each category should be easy to understand. Look back at past data and recent trends to find meaningful distinctions.
What patterns emerge? What can you learn from how similar customers purchase (or don’t purchase) from you? Look for shifts in economic conditions, competitors, and customer buying patterns that can help you pinpoint profitable market segments.
Step 2: Find common product groupings.
Single out your most valuable products and services. Organize them by categories appropriate for your business, including:
- Proprietary products
- Outsourced products
- Customized products
- Add-on services (training, installation, shipping)
- Ongoing contracts
- Production processes
- Labor intensity and workflow
- Cost structure and margins
Grouping your products and services can provide useful results. Find out how your business can maximize delivery strengths to best meet your customers’ needs. That’s where you’re most likely to find the highest value offerings.
Step 3: Assign direct costs to customers and jobs.
Assign direct costs—like labor and materials—to specific jobs and customers. Load cost data into your financial system or a spreadsheet.
You may need to revise your company’s timesheets or invoices to accurately reflect payroll hours and material expenses. Let employees know this tracking is designed to capitalize on market segment profitability and you’ll need their help to correctly report time spent on the job.
Now you’re ready to assess profit margins on specific customers, products, and services.
Step 4: Run segment reports to focus on pockets of profitability.
With your newly organized database, you can generate profit and loss statements by product, project, or customer. You’ll have profit margin reports that provide insight on what drives the cost structure for each category. You may find certain jobs cost more than you thought while others were more profitable than you realized. What better information could you have for targeting these market segments to increase your company’s profitability?
Add business forecasts, industry data, and competitive analysis to establish benchmarks like target sale amount, profit margins, and employee efficiency. Compare your data with these benchmarks to monitor changes in your company’s profitability.
Knowing the profitability of your market segments will allow you to create strategic plans and growth strategies that consolidate your efforts and yield more profits.