Ask most any distributor why they are in business, and they'll give you a pretty straightforward answer: to provide a service, but also to make a profit. Too many times though, distributors are stuck in a circle of providing those services, but not really accruing any profits. Upon realizing that they are caught in this kind of no-win situation, some distributors make the decision to not really "fire" their customer, so much as stop doing business with them. Some may even insist that the customer buy more to make the relationship more beneficial to the distributor.

"It's all about discerning the good customers from the bad customers," says Dick Hall, president of PRC Industrial Supply, a wholesale conveyor belt, industrial hose and hydraulic component distributor in Portland, Maine. "We do a comparative analysis of each customer about once a year to ensure that dealing with them is a benefit to us. If they're not, we'll raise prices or pull salespeople from the account until they leave, or in some cases, write them a letter telling them they'll not be able to buy from us anymore."

When it comes to detailing out the profitability of one customer compared to another, distributors look to the amount a customer buys, compared to the amount of service and attention the customer demands. As an example, a customer who buys a minimum amount of one product, while demanding a constant stream of attention from the sales staff, is a drain on a distributorship's resources. There's no profit in catering to that customer, and the best business decision may be not to do business with them.

"Just like letting go of an employee that is not performing to levels to be productive, customers who are not meeting business terms should be released from the arrangement," says Jeff Pickelman, owner and CEO of Northern Industrial Supply, a power transmission, industrial supplies and air compressors distributorship in Saginaw, Mich. "We place an emphasis on value-added services and hire knowledgeable people, so there is a lot of overhead involved in servicing our customers. I receive a daily report on orders, billing, quotes and profit margins. There are 1,500 customers in our database, and this report points to those that are not profitable."

At NIS, Pickelman is in the process of firing a customer. An OEM customer that the company has dealt with for about 30 years has, over the last 18 months, become very slow paying, and is not buying as much as it used to. Back when the customer was buying more and was operating at full capacity, NIS was willing to carry payments, but lately, the customer is deferring more of its money to investors, not its suppliers. Also, the customer has been demanding more time from NIS's salespeople. Pickelman proposed a new arrangement with the customer, but they were not willing to accept that.

"In this situation, we are taking all the risk," says Pickelman.

But no matter what the circumstances, it is not an easy decision to fire a customer.

"We're in business to provide a service, but make a profit," says Stafford Sterner, president of SJF Material Handling, Inc., a material handling distributorship in Winsted, Minn. "When that is no longer feasible, by customer expectations or through services, you can't provide them with what they want to your benefit. Everyone has 24 hours in a day, and there's only so much time for running a business. The most efficient business owners are the most successful."

Someone in the distribution business once said that 20 percent of a company's customers generate 80 percent of its revenue. If that's the case, then why would a distributor spend an hour with a customer for $100 in revenue when they can spend the same time with a profitable customer that could bring in one hundred times that?

"Actually, in industrial circles, I believe that the percentage is more like 90/10, and that's especially true in the independent distribution market," says Pickelman. "So when it comes to firing a customer, you have to look at a lot of things: the requirements the customer puts on your people; your strategy of providing services to them; and the opportunity cost involved."

When Hall bought PRC 20 years ago, he spent time going through his customer lists and looking at their buying habits. Of his customers, he sent letters to about 300 of them, explaining that if they wanted to continue working with the company, they would have to buy more, as their business was not profitable to the company.

"About 10 percent of them called me immediately, saying that they didn't realize that they bought so little, and pledged to increase their orders, just to keep working with the company," he says. "Of those that didn't respond at all, we stopped working with them, and our customer base turned more profitable for us."

Hall also has stopped selling to customers for other reasons.

"We offer a guarantee on our products, and some customers take advantage of that in an unethical way," he says. "One customer brought back old boots with new receipts saying that the boots broke down, asking that we honor our guarantee and give him new boots. The first couple times, we didn't think much of it and replaced the boots. But he continued to do this: bringing in clearly used year-old boots, and claiming that they were only a couple weeks old and were faulty. We finally just gave him a last credit, and told him we'd not sell to him anymore."

"It's very important to be up front with a customer, and document everything that you'll do for them according to their fee," says Sterner. "Customers also should communicate their expectations."

Sterner gives the example of an order's estimated delivery date for a Friday. The order shipped on time, but didn't get to the customer until Monday. The customer though, had incurred expenses on his end by setting up a crew to install the product that Saturday. Since the product didn't arrive Friday, the customer asked Sterner to deduct the labor and costs of the crew on Saturday from the shipment's cost. Sterner refused, noting to the customer that the delivery date was an estimate, and showed where the customer had signed off on the estimate.

"Those kinds of miscommunications are common these days," says Sterner. "The delivery was never guaranteed for Friday. If he had told me his intention for the Saturday crew, I would have told him that. Or if he'd told me it had to be there on Friday, I would have made that happen."

Sterner says that, had he done something wrong, he would have apologized and made the situation right. But as the customer did not pay attention to the phrase "estimate," it wasn't his responsibility to fix the situation.

"Customers will threaten to not do business with you in a situation like that, but it's important to keep in mind that, no, the customer is not always right," he adds. "Taking preventative measures, like having them sign for everything and ensuring they are knowledgeable of your services and the costs, make them responsible for the product and their own actions."

Not all distributors know how to start when it comes to cleaning out their customer databases. Begin by looking at the customer's orders and the time you spend on them, say these experts.

"The bottom line is that you have to look at the profit margin a customer brings in comparison to your overhead, level of time required to service them and the product you have to keep on your shelves for them," says Pickelman. "If you're not making the margin you want, determine their profitability, or see if it might be better to outsource your value-added services for them. Why do business with someone who will make you lose money?"

Adds Hall, "Most companies look at the energy they put into a customer and how much they get out of that energy usage. Some customers are cherry-picking through their suppliers and only buying the things that make them profitable. We should, too. You can't afford to have your business's energy drained like that. If you do this, it's always better to err on the side of forcing your customers to be profitable to you."