Imagine you’re packing a backpack for a long hiking trip, and you have room for one more item. One option is a water bottle. The other is a bag of rocks.
In a situation like this, it’s easy to recognize value.
But when you’re caught up in the day-to-day of growing a business, it’s hard not to focus on holding onto every customer, even when some add more weight than value. Many distributors focus on preventing customer turnover without asking a more important question: Which customers create profit?
When it comes to preventing customer turnover, focus on two things. First, recognize when customers enter the “at-risk” zone — changing their behavior in ways that show up in order size, frequency, or engagement. Second, and more importantly, identify which of those customers belong on your profitability A-list.
Not All Customers Are Created Equal
When segmenting your customers, your “A” customers are not necessarily your biggest ones. They may buy a lot on a regular basis, but if they require significant resources to support, those larger accounts may belong in the B or C tier in terms of profit generated.
If you don’t distinguish between customer size and customer profitability, you may find your team stressing out over the wrong accounts. The priority should be high-risk “A” customers that drive disproportionate profit and may be on the verge of defecting. When they do, the impact won’t be linear. It will be outsized. You’ll lose their revenue and margin contribution.
You’ll also lose operating leverage as you scramble to make up the difference. Order velocity will slow. And looking ahead, it doesn’t take many high-value defections to materially impact your valuation multiple when it’s time to exit.
Unfortunately, many distributors struggle to identify these high-value customers at risk of leaving until it’s too late. That’s because they’re not taking a close enough look at customer profitability at the order level.
The Value of Visibility
As a distributor, if you don’t have full visibility into how profitable your customers’ orders really are, your most valuable customers can look just like everyone else until it’s too late. For most distributors, we’ve found that up to 35% of all orders contain profit leaks. Without a way to identify those defects, they’re flying blind. They’ve got thousands of customers and no way to properly prioritize them. They’re often relying on their ERP to surface the necessary insights, even though ERP is a system of record, not intelligence.
If you and your team are constantly putting out fires, it’s a sign you need better visibility and a practical framework for acting on what you see to retain your most valuable customers.
The good news is that this problem is solvable if you put the right structure in place:
1. Take a closer look at your orders. Orders are the atomic unit of value, and they tell the story of a customer’s profitability in real time. The problem is that they get aggregated into monthly financial reports, where the story gets lost in the big picture. Invest in a way to surface that data and then commit to using it in your day-to-day workflows.
2. Leverage order-level visibility to segment customers by value. Once you have a grasp of which customers are most profitable, segment them into A-, B-, C-, and D-level customers. You may be surprised to find some of your biggest accounts on the lower-level lists.
3. Identify behavior changes, not just inactivity. Customers who buy annually can trigger false alarms, while returns can artificially reset the clock on customer contact. Instead of worrying about how long it’s been since you heard from an A-list customer, look at their usual cadence and determine if they’ve made any changes worth worrying about.
4. Keep risk buckets simple. You don’t need a dozen gradients. Just sort by low, medium, and high risk. Cross-reference these buckets with your value-based segments, and you’ll have a neat list of the customers you need to focus on.
5. Encourage value-based discipline. The above steps are not a one-time solution. A low-risk customer can become high-risk quickly, and if you wait for a monthly report, you’ll fall behind the curve. Implement clear rules for resolving your high-risk “A” customers. And don’t remove a customer from that high-risk bucket until their behavior has returned to normal.
When you know which customers to prioritize, you move from a reactive position to a proactive one, protecting profit rather than scrambling to maintain the status quo. And that opens the door to what I consider to be the biggest benefit of all.
More Profit Means More Freedom
Protecting high-value accounts is profit discipline, a risk management strategy, and a valuation booster, all in one. And all those things add up to more freedom for an owner.
When I talk to leaders, that’s the word I hear the most. They want the freedom to invest in their business and their people. They want the freedom to execute their vision and finish what they started. They’re not just trying to make money. They’re trying to build something great and leave a legacy. Without a strong profit engine, companies are vulnerable to external shocks and unlikely to command significant multiples from prospective buyers.
The path to real freedom starts when you ask the right questions. Rather than asking about revenue and turnover rates, ask:
- Are we focusing on the customers that really matter?
- Which of them are starting to drift?
- And can you catch them drifting before it hits the P&L?
Customer turnover is inevitable. You can’t send out an S.O.S. every time someone threatens to jump ship. Save it for your most profitable customers because those are the ones that hurt the most, especially if you didn’t see it coming.
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