An article published on the Web site of the Conference Board, a management research firm, caught our attention because it clearly showed the value of a small business determining the profitability of individual customers.

The article mentioned that a Harvard Business School study showed that only 40 percent of the customers of a Swedish supplier of appliance wiring and heating elements were profitable. The company discovered it was actually losing money, or breaking even, on many customers it had deemed profitable. The reason: The traditional accounting system did not accurately reflect the disparate costs of producing and handling individual orders.

The article also pointed out that a high-tech service provider had set up a customized Web site for its 250 highest volume customers, enabling them to instantly call for personalized services from dedicated teams. The system cost the company $10 million a year. Was it worth it?

On a number of occasions, we've detailed how some distributors have analyzed their customer base and determined that their largest customers were certainly not their best ones when it came to profitability. In fact, some of these customers were actually costing these distributors money because they were more demanding of services.

Last month, for example, our cover story focused on a Michigan distributor who had a storeroom management contract for a major customer. He gradually "fired" the customer because of tight margins and slow payment, and refocused his sales efforts in other areas. The strategy turned out to be successful.

In another example, a Northeast distributor of rubber hose and accessory items sent out a letter to some customers firing them because he determined it was costing him extra time and money to service those accounts.

I'm certainly not suggesting that you fire your largest customers. But it has become increasingly apparent that with shrinking margins, more competition, and a smaller customer base it is crucial to determine the profitability of each of your major customers. All you have to do is look at how many distributors are participating in reverse auctions, and see the adverse effect it is having on their margins when they actually win such a contract.

Evaluating your customer base isn't just something to do. It's a necessity.

jkeough@reedbusiness.com