Do You Really Know Who Your Top Five Best Customers Are?
Here's an interesting exercise for any distributor: ask different people around your company who your top five best customers are.
Chances are you will get many different answers, depending on who you
ask. Sure, most people in your organization can probably point to a
handful of your largest accounts, but do they really agree on who your best
customers are? By "best," we mean the ones that are high margin, high
volume, and loyal customers with low cost to serve. In other words,
which customers are the most profitable, high-performing accounts that
drive your business forward?
I recently spoke with a distributor whose sales rep was seeking an
additional discount for what he felt was a deserving customer. "They're a
great customer," said the sales rep. "They're always calling in with
new orders." The executive was hesitant. "That's just the problem," he
stated. "They should be placing those low-dollar orders over the Web so
they cost us less to process!"
And therein lies the problem: each person's perspective results in a
different answer. Your CEO, CFO, Sales Managers, Customer Service Reps,
and others all have varying opinions of who your best customers really
are. No one has gone through the exercise to figure out each account's
true cost to serve.
A number of distributors have tried Activity Based Costing in the
past. I say "tried" because that's the response I hear most often; very
few have been successful in maintaining such a program, citing
complexity, time, and tedious activity as the main obstacles. The result
is a general lack of understanding in the industry as to what percent
of a distributor's overall customer base is unprofitable business.
In his book, Islands of Profit in a Sea of Red Ink, business
consultant and MIT senior lecturer Jonathan Byrnes claimed that 40% of
most businesses are unprofitable. The unprofitable portion of the
company's business often goes unnoticed because it is subsidized by the
company's top-performing customers. Surely, this can't be the case in
distribution…can it? Can nearly 40% of your customers be unprofitable
One distributor I spoke with thinks so. He claimed that, after much
research, they learned that 87% of their net profit was generated by
only the top 5% of their customers, and that 43% of their customers
represented only 2.5% of their sales. In other words, 43% of their
customers were the kind of business they did not want to be
doing. However, simply selling more product is not always the answer to
improved business performance. If your cost to serve exceeds your
margins, you're actually hurting your company by selling more.
Distributors need to invest in tools to better understand their
customers' true cost to serve. Only then can decisions about pricing,
shipping and deliveries, and other special services be made for specific
accounts with the confidence that they're not going to erode your
margins in the long run. Sometimes, your strategy is best defined by
what you say "no" to. But you need the data to support those decisions.
Customer Profit Analyzer is a new solution from
Epicor that provides distributors with a tool for understanding each
customer's net profitability and true cost to serve. The application
will segment and grade your entire customer base so you can finally
agree as an organization who your best- (and worst-) performing
customers are and why. Learn more about Customer Profit Analyzer.
Posted by Scott Frymire, Senior Manager of Product Marketing at Epicor Software Corporation