Ed Farley: Do You Have The Right Customers?
Friday, May 8th, 2015
The phrase…”the customer is always right” may be wrong. One of the biggest challenges for business is to determine who their customers should be. Too often we do not realize that may of our customers cost us profit.
In the B2B world every business has to fully understand their costs. Some refer to this as ABC accounting or analysis. Knowing the exact cost of purchasing or manufacturing, warehousing, picking, delivery, customer service and so on can tell you if you order is profitable or not. The issues come when a customer(s) have requirements that adds costs. An examples may be multiple deliveries, special packaging, credit terms, held inventories or odd sizes to mention a few. The base price may be at list price but all the ‘add on’ costs can make that order and that customer unprofitable. The challenge…can that be fixed? In many cases the customer is unwilling to or cannot adjust their requirements.
Several years ago I was in an executive position with a large distribution company that had sales of over 6 billion dollars and was very unprofitable. Incredible…6 billion dollars in sales and unprofitable. We instituted rigorous cost cutting measures but realized that this was not enough. We also realized that we did not understand our own costs. After a six month initiative lead by our finance team we had a solid understanding of our costs down to the minute detail. This was only half the battle. Once we applied the cost model to our customer base we clearly saw the issues. A large number of our customers were actually unprofitable. At the same time we were pay commissions to sales reps on orders going to those customers. Unacceptable!
We had been sailing in the fog without a compass.
Armed with the right cost information we set out on a journey to right size our customer base and redefine what a profitable order and profitable customer looks like. After two years of hard work and tough decisions we moved the company into profitability with two billion dollars less sales…yes two billion less sales! By moving as many customers as possible to a profitable platform and then removing the excess costs we realized what life was like being very profitable.
This exercise requires accurate numbers, a solid plan and constant monitoring of progress to insure you are on track. Once you know you have the right customers your next mission is to provide a value platform that delights them time and time again.
Reach out to: EdFarley@edfarleyassociates