In a previous discussion, we described how to classify your customers based on how profitable they are and how efficiently a Distributor can do business with them. Once accounts are classified, the Distributor can then focus on the best customers in order to garner more business from them, find more customers like them, and build loyalty by making certain they are well served and satisfied. Typically the best customers are a select few accounts, but they contribute far above average revenue and profits. The remaining majority of accounts require a different approach to analyzing what they contribute and how best to work with them.
A surprise for many Distributors is that a lot of accounts they consider “good customers” because of the frequency or regularity of orders, the total amount of revenue they contribute or the total gross profit or gross margin percentage they seem to provide are actually costing them significantly more money than they bring in to the company. What is surprising is that most Distributors do not even suspect that these customers are seriously damaging the company in ways that could ultimately destroy the business completely. At a minimum, these customers take away resources that are needed for addressing the needs of more important customers and business that the company cannot afford to risk. These customers are known as “Service Drain Accounts” (SDA) because of how they cost the company more money, time and people than they contribute.
Some of the red flags to look for in accounts that may be costing you money include the following:
- SDA customers are the source of high cashflow which makes them appear to be good customers, but they typically have a high frequency of orders, often multiple orders per week, or even multiple orders per day.
- Compared with HEA (highly efficient) or HPA (highly profitable) accounts, SDA customers often have average order sizes that are a fraction of the more profitable customers.
- SDA accounts often require significant support during the sales process and may have above average number of order changes, product returns, special requests and pricing concessions.
The first priority for addressing this problem is to measure what customers contribute financially to the Distributor compared to what it costs to serve them and fulfill their needs. Ideally, solutions such as Waypoint Analytics should be implemented which enable the company to track all costs related to customers and transactions on an ongoing basis in order to continually adapt to the profit growth objectives of the business. However, distributors can start to get a handle on which customers are responsible for lost profits and a dis-proportionate amount for resources allocated to them by using marketing analytics that capture transaction-level information about customers, products, orders and trends including major cost contributors.
At Real Results Marketing, we often begin by analyzing recent and historical business transactions as part of profiling the distributor’s customer base. While this is primarily intended to discover characteristics of the ideal customer segments and trends about growth, margins and product potential, we also uncover information about the profitability and efficiency of each customer. With this information we can begin to make short-term recommendations for business improvement priorities while embarking on a long-term strategy for managing profits. Once the major SDA culprits have been identified, for example, the Distributor can start to implement remediation strategies. The priorities for improvements of accounts can be prioritized by the size of the potential benefits such as increased pricing, optimized service terms, or other bottom-line improvements.
Return on Focus
Service Drain Accounts are responsible for most Distributors giving back a substantial portion of the profits earned by the best accounts. As a result, it is critical that Distributors take time to identify who they are, how much they actually cost the business, and what actions can be taken to mitigate the damage. Ideally, the SDA accounts can be converted into profitable accounts or they can be encouraged to go elsewhere if they can’t become good customers over time.
While the larger SDA accounts can be a significant cause of lost profits, it is also critical to evaluate how the majority of Regular accounts can be a source of significant losses or incremental profits depending on how they are managed. We will discuss how analytics plays a key role in how to make money with smaller customers in a subsequent discussion.
Robert Kelley is Partner with Distribution Strategy Group. He’s had an extensive career as a technology leader with high-growth companies from high-technology startups to large public corporations. Using quantitative analytics models and software applications, Rob now helps distributors optimize pricing, quantify economic value, analyze the competition, and build customer profiles and market segmentation. Reach out to Rob today to take a data-driven approach to your business problems:
rkelley@distributionstrategy.com.