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Improve Profitability with Customer Stratification

In his book, Islands of Profitability in a Sea of Red, author and senior lecturer at MIT Jonathan Byrnes argues that 40 percent of any business is typically unprofitable, and those losses are subsidized by the profits from the top 20-30 percent of your best customers. Understanding which customers are profitable-and why-can result in significant net profit growth for any business.

A while back, ProSales Magazine compiled an article on variable pricing1, also known as customer stratification. Attempting to help LBM dealers answer the ever-looming question, "What can I do to increase profit?"

The article states that, "That's the question forward-thinking dealers are asking, and business intelligence providers have a mix of answers." And, "With customer-ranking systems, management and salesmen are still involved in the pricing process. High-tier customers might be offered personalized discounts to encourage them to buy more. Sales reps can still utilize all of the tools at their disposal and work on boosting low-tier customers into more profitable partners."

Reveals the Most Profitable Customers 
Business intelligence solutions-like Epicor BisTrack™ Customer Stratification-reveal who the most (and least) profitable customers are, based on an equation that considers a combination of factors. It allows you to understand the gap between your customers' transactional “gross margin” and your company's true net profit. This delivers a model for the type of business you want your sales team to bring in: high volume, high profitability, and low cost to service.

Understanding total profitability for each customer 
By going beyond ranking your customers by sales revenue or average margin, you can grade customers by taking into account factors that reflect: 

  • Buying power: revenue, line items, product line penetration 
  • Cost to service: return rate, number of deliveries, special order lines, quote-to-order ratio 
  • Loyalty: repeat orders, sales trend 
  • Profitability: trend, as well as gross profit dollars and margin 

Because every business is different, you determine which factors and which metrics should impact your customer rating, and the weight that each factor should hold. Then let the BisTrack Customer Stratification application categorize each customer accordingly, based on the data in your BisTrack system.

Sunroc Building Materials Systems Manager, Scott Blomquist, goes into detail about how his company uses technology to determine pricing for its customers.

Decisions about pricing, delivery, and other services offered to customers no longer need to be made by "gut feel." Now you can arm your sales people with the information they need to make the appropriate decisions, have meaningful and constructive conversations with customers, and develop mutually beneficial customer relations. In short, pricing technology provides unmatched visibility into the true profitability of your customer base, and arms you with the data you need to improve customer relations and profitability.

1"Variable Pricing Has Come to LBM: Here's How to Stay Competitive," ProSales Magazine, June 2015.

Posted by Kevin Hodge, Director, Product Development and Management, Epicor BisTrack and Epicor LumberTrack, Epicor Software


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