What is the best way to evaluate your customer base? What are the essential criteria?

Compile a “Top Ten” list? Is it the economy, stupid? Or is it simply that the one who buys the most is your best customer?

The process of evaluating customers can vary, as can the conclusions the process yields.

For example, if a customer is demanding more in services than their business is worth, what does the distributor do? If the relationship is strong enough, maybe a meeting is in order and, hopefully, something can be worked out.

“The easiest or best customer is the one that orders 12 months worth of stuff on a monthly delivery and then never calls back,” laughs Scott Dickson, vice president of Pleasanton, Calif.-based pneumatic products distributor Teco Pneumatic. “But that's not realistic.”

If an evaluation doesn't reflect well on the customer, some distributors have been known to, in effect, fire that customer. Dickson thinks that is a bit extreme

“I don't think you ever actively fire a customer,” Dickson says. “The only bad situation would be to get a customer that wants all the service levels [we offer] … but doesn't buy enough. In that case, you're stuck with two choices and I don't think firing is one of them. You either charge an appropriate amount of money in gross margin dollars to service them, or just don't provide the services they may want for their level of sales. And then they can make a choice.”

Vancouver, British Columbia-based Belterra Inc.'s president Don Latham looks closely at gross profit during the customer evaluation process. Belterra is a distributor of conveyor belts and related services. Depending on the findings, Belterra might institute a price increase to recoup its costs and gauge what that customer's reaction will be—and what, in turn, that may eventually lead to, Latham says.

“You look at the overall value. Maybe you're under-pricing the value you bring to the customer. So you realign your pricing with that value, instead of just looking at statistics,” Latham explains. “If a customer is right for your long-term strategy, your hope is they'll become profitable as you align your services to their needs.”

Once the price increase is implemented, the company will see what happens—or doesn't happen.

“Presuming it's a significant customer … it's important to open up some dialogue and see if you can change the way the customer does business,” Latham says.

Sometimes both customer and distributor find they have more than a few things in common, he adds.

“If they are tying up a lot of your time, someone on their end is tied up as well. The hope would be you that could find a better way of doing business,” he says.

The evaluation process should provide a distributor with an idea, at least, of how serious a customer actually is about doing business with them.

“When you talk 'serious customers,' we'd consider everyone that meets our strategy as being a serious customer,” Latham explains. “But it's important to have a clear strategy of what customer segments you want to go after. Consequently, when you look at customer profitability, you would probably have a willingness to extend more when your customer is in your 'sweet spot' strategy, versus those who aren't.”

Chances are a distributor's outside salespeople spend more time with customers than anyone else. Feedback from salespeople is helpful, but should be kept in perspective.

“Bear in mind that most sales guys haven't seen a customer they don't like or don't want to save,” Latham says with a chuckle.

Outside salespeople can give information about a customer that might, for example, show that the customer is more interested in price shopping or bargain hunting, Dickson says. But, like Latham, he takes it with a respectful grain of salt, because a salesperson is primarily interested in, well, the sale.

“For the salespeople I've met, every order is a good order, no matter what,” Dickson laughs. “Their goal is to sell dollars. They won't think about what goes into that dollar or the sale [overall].”

Indeed, what goes into each dollar a distributor derives from a customer can be the crucial point, depending on the size both of the customer and the distributor.

“You really need to understand the expenses that each transaction is generating,” Latham says.

When focusing on the gross profit generated by a customer, Latham explains, accounts receivable can be revealing.

“One of the larger issues is the pay period, the accounts receivable,” he says. “On a large transaction, it becomes important to get paid fairly quickly. You have to balance paying your supplier with receiving [payment] from your customer.”

Depending on the customer and the product line they buy, a distributor can be tested in terms of what service values they must bring, Dickson points out. In addition, certain compliance demands, such as precise product size and number, can also drive up a distributor's expenses before final delivery—and final payment—are completed.

“[A customer] may be relatively easy to handle on the surface, but if you look underneath, they may require us to have a lot more compliance with their programs,” Dickson says. “By definition, the bigger they get—the bigger the customer—the more requirements we'll have to service.”

Many distributors are using, or looking closely at, technology to add to their customer evaluation process. Belterra and Teco Pneumatic are in the early and late stages, respectively, of implementing Customer Relationship Management (CRM) programs for their companies.

Latham has been president of Belterra since October 2007. One of his goals is upgrading the company's computer technology to include a new CRM system. Latham looks forward to having CRM and the resulting information up and running, possibly by early in 2009.

“It's something that is a challenge with this company, because we don't have the information technology we need to support a rigorous [customer] analysis,” he says. “One of the things we'll be looking for in that [new system] is the ability to analyze customer profitability.”

By contrast, Teco Pneumatic is in the latter stage of implementing its CRM program and expects to have statistics and feedback from it by August. Dickson is optimistic that by the end of this year or early in 2009, the emphasis on CRM will start to pay off.

“Most of us have a gut feel such as, 'Customer X is really great. But Customer Y really isn't,'” he says. “Where we're heading, and we're not there yet, is to have the data beyond just our gut feeling. [It's also] how many salespeople it takes, how much inside sales time. … We're trying to capture all the activities of our sales force—[customer] potential, current sales, the gross margins.”

Both Latham and Dickson know technology cannot be the end-all for customer evaluation and the resulting decisions.

“Without question, you can't [rely on technology],” Dickson explains. “Our vision right now with the statistics and CRM is [to gather] a very limited number of statistics to watch. But we also want to implement a lot more management contact with our largest customers, so we have the subjective as well as an objective look at each customer.”

As he investigates CRM for Belterra, Latham is aware of what information that technology can provide—and what it can't.

“There's a lot about customer relationships that doesn't get automatically captured,” he points out. “The technology tends to measure transactions, but we know a lot happens outside of the transaction. Some customers can tie up a lot of resources outside of the transaction. How do you capture that? I know there are some CRM systems that attempt to do this. But I think that is still hit-and-miss.”

Dickson's hope for Teco's CRM use includes being able to categorize their customers in a manner that will show management just how much expense goes into each purchase, he explains.

“We are going to be segmenting our customers [as] 'A,' 'B' or 'C,' because we want to make sure the proper activities are being done for the best customers. That doesn't mean the largest customer would necessarily be an 'A.' We're trying to identify our customers—what gross market dollars they produce, what sales they produce and if they are in a strategic industry,” Dickson says.

Input from Teco's sales staff about customer's buying habits is being incorporated into the CRM package, Dickson says. In time, he sees this as another source of customer information for Teco's managers, something they can use in evaluating the strength of each customer.

“It's a matter of what you want to ask the system to do for you. So it's a matter of adoption and once we get the data, then we ask, 'Now what do we want to do with this?'” Dickson explains. “We can go in there to a vice president and say, 'Here's what we're doing for you. Here's our cost and you're not producing enough revenue for that. So what would you like to do?'”

Companies like Teco are prudent to do their due diligence and research—about themselves as well as their customers—before committing to a CRM software program, says Thad Zylka, vice president of the Distribution Supply Chain Group at Infor.

When Infor begins implementing CRM for customers, “We make sure we understand what [a prospective customer's] business requirements are,” Zylka explains. “And understanding their requirements means we have to understand what their customers' requirements are, too.”

When starting out on a CRM implementation, Zylka explains, Infor reps will spend two to three weeks, “in a cumulative effort we call 'discovery.' After that, we will have a pretty good feel of [a customer's] culture and their business problems.”

While the distribution grapevine has been giving CRM good reviews in recent years, other characteristics have also been driving its use, he says.

“Customers are demanding it,” Zylka says. “The marketplace is driving it. And the cost of doing this is effective.”

In addition, the economic climate is prompting companies like Teco Pneumatic and Belterra to use technology as part of the customer evaluation process.

“Every time there's an economic jolt, so to speak, you have to figure out how to be more efficient—managing your business more effectively and delivering value to your customers,” Zylka says.

In a way, it's only fair that distributors have as many tools as possible for their customer evaluation process. After all, those customers are evaluating their distributors, too.

“[We're being evaluated] every day by our better customers, as well as the big customers we deal with,” Dickson says. “We're always being evaluated for AVL (Approved Vendor List), our delivery, our quality and our service level. So they're evaluating us. It's a two-way street, without question.”

Latham agrees, adding that many times in these scenarios, a distributor and customer will have more in common than they may realize—making it a distinct possibility that more customer evaluation information and tools can be a win-win situation.

“It may very well be that if a customer's behavior appears costly to us, maybe the way we do business appears costly to the customer,” he says. “There can be a chance there's a mirror image at play there.”