Which customers are making—or losing you—money?
By Curt Leo -- Industrial Distribution, 5/1/2008 9:13:00 AM
Your customers are not your children—there is no rule saying you have to love them all equally. Nor should you, as chances are your worst customers are costing you money. But getting smart and aggressive about underperforming customers can be frightening—nobody wants to alienate a good future prospect.Some suggest careful, activity-based costing to detect and manage unprofitable or underperforming customers. But in the real world those measurements can be too difficult to make and the true costs of each activity too difficult to quantify. Furthermore, since so many distribution activities are measured in percentages, it is tricky to translate the dollar cost of a particular employee function within the bigger margin picture.
Instead of trying to measure each and every action your employees make on behalf of the customer, watch the customer's activity. Each time the customer reaches out to you, ideally you both learn something about each other and gain value. Of course, that is not always the case.
Everybody with a stake in the sales and fulfillment process can provide valuable insight. Are customers placing far more inquiries and RFQs than orders? If you are simply playing the role of a token third bid for an account, the time spent preparing quotes for orders they have no intention of placing could be eating away your profits on the few pieces of business they do give you.
Rather than cutting ties altogether, accounts with low order ratios can be guided towards automated, online quote generation if their level of current business does not warrant a hands-on account manager. No sales rep wants to fire a customer, but sales can be incentive to get bigger orders or move customers with unprofitable purchasing patterns towards grouped shipments, such as a weekly account shipped out on a Friday.
Warehouse managers know the real impact each order has on stocking levels. Are customers forcing too many cases to be broken up? Or, conversely, are some customers making inefficient orders because they are being forced to take cases when a break would not be an undue hardship? Working with sales and marketing, the company can structure incentives to better guide customers into the order quantities and frequencies which keep the warehouse humming at optimum efficiency, resulting in more on-time shipments and fewer make-goods—and that boosts the bottom line of every customer account.
In the service department, watch for costly, time-consuming inquiries into order processing and shipment status. But don't disregard or shut out these messages entirely. If customers are calling repeatedly to inquire about their purchases, they are telling you they need a customer portal that can provide the information when and where they want it.
Even if tracking activity costs aren’t feasible, don't discount the role your internal processes can play in the bottom line of each customer relationship. At the end of the day, your company only makes money on an order when payment is collected. Every single step that occurs between the creation of an order and the processing of a payment is a cost to you.
I have worked with companies that were able to reduce the number of internal touches between order and payment from 12 to four, with no loss of accuracy or customer service. With every touch representing not only a cost but a potential error, you can hardly afford not to optimize your internal processes.
To do this, you will need a customer management system that can track your customers from the sales floor to the warehouse, providing a unified view that anyone in the organization can access from anywhere. Such a system should be able to provide a dashboard to sales, fulfillment, and the executive office which shows the true cost and return on each customer, as viewed through the lens of touches, efficiency, and revenue.
Business doesn't need to be any more complicated than it is. By optimizing your relationships with all of your customers, you can improve their satisfaction, and your own profitability.
Curt Leo is the vertical sales manager-distribution for NetSuite. He can be reached at (877) 638-7848 ext. 3020, or cleo@netsuite.com.
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