The leading minds of the distribution industry have been talking about unbundled services, customer profitability, and understanding costs for years. And yet, making these ideas operational, and our companies more profitable, has been difficult for most distributors, especially those who are small or mid-sized.

But the future of distribution has taken a heavenly twist with the publication of Angel Customers and Demon Customers, a new book by Geoffrey Colvin and Larry Selden. Their ideas about customer profitability — about how our actions make angels (profitable) or demons (unprofitable) out of our lifeblood — should cause a revolution in thinking and action in the distribution industry.

Customers are not inherently "angels" or "demons" — it's the distributor's services that accompany the products they buy that make them profitable or not. Since every customer should be profitable, we have to unbundle and adjust price and service packages based on what customers are willing to pay for.

This means knowing your costs — of each and every service function, for each and every customer. Not only picking, shipping and delivery, but also all transaction costs, including creation, order taking, problem solving, selling, financing, and follow-on service. Most distributors are far away from knowing costs at this level, and most manufacturers are even further away from understanding the value of these services. It is critical, though, to know where we're making money and where we're not.

It's hard to implement this in a mid-size company, and at C.H. Briggs Hardware, we've got the scars to prove it. But we've persevered, we know a great deal about our customers and our segments now, and we've improved profitability.

This has been done in two ways. First, by going through the exercise of understanding our time and our costs. We've re-vamped processes that are time and money drains — sinkholes that became very obvious when we did the exercise to allocate 100 percent of our costs to customers.

And second, we've improved profitability by getting to work on our demons. We identified unprofitable customers and analyzed why we were losing money on each one. We examined two customers who looked good on paper, but closer examination showed them to be demons.

The analysis was surprisingly easy — in one case, our shipping costs for specialized small orders was outstripping our margin; and in another, the number of orders per day increased transaction costs to an unprofitable point. As fixes, we added new packaging and shipping features, and then renegotiated pricing for the first customer. Then we took the second one through an exercise that showed how much they could save by ordering self-service on our website once a day, rather than calling numerous times and receiving multiple orders and invoices. There were big payoffs for us, and we had happier customers, too.

Understand your customer profitability. And be not afraid — you have nothing to lose but your demons!