Improving Customer Quality to get that Out-Sized Multiple When it’s Time to Sell

One important aspect impacting the value of a business is its customer quality: an important component of a business’s revenue quality.  High-quality revenue is generally considered to be sales that are sustainable, predictable, and profitable and thereby reduce the risk for any new owner or management team.

While customer concentration levels (eg: the percentage of business coming from top customers) and customer churn rates (loyalty) are normally assessed by potential buyers, the true value of a business’s customer quality is often poorly articulated by sellers and thereby risks not being not fully reflected in an offer.  Just because you can point to some blue-chip, well-paying, loyal customers, doesn't mean a buyer is going to pay an above-market premium for the business.

However, whenever you can demonstrate a track record, with hard data, on the actions you have taken to improve customer quality and its impact on bottom-line results, you are much more likely to have potential buyers pay higher multiples.  And even if you're not a seller, who doesn't want higher-quality customers to grow and simultaneously build resiliency into the business.

Traditional tools like Net Promoter Score (NPS), Customer Experience Management (CXM), and Customer Relationship Management (CRM) can be useful ways to measure and guide management on initiatives that improve customer quality.  However, often you may need to go much further.  It means moving from data and information, to intelligent insight, to actions, to results.

As an example, I recently spoke to the owner of a fast-growing natural foods business.  With detailed data on sales per point of distribution, he was able to show, for his business, the difference in quality between customers even when purchasing similar amounts of product each year.  He knew exactly when to double down on successful product launches with one customer and when to back off and ride out the relationship with other customers.  It was a matter of focusing his efforts where he got the best results with insights from robust data.  In another example, a business services company was able to demonstrate the actions they took with specific customers to drive the percentage of sales as recurring contracted revenue.

There are numerous advanced tools available to business owners to measure and monitor important intent and sentiment data about your market, business, products, etc. across internal systems such as your CRM and outside sources such as social media.  Many of these tools are now using advanced analytics, artificial intelligence, and big data to provide insights not available to business owners only a few short years ago.

The key is to find the right tool(s) for your business to help your sales and marketing teams expand and grow your base of high-quality accounts.
​
Bottom line, being able to use data to demonstrate the quality of your customers, along with the strategic initiatives you undertake to improve customer quality, can translate into higher valuations.

---