Managing the 3 Types of Customers

03 October 2023

A customer is many things, but most of the time, they are either a profit-peak customer, a profit-desert customer, or a low-profit/high-loss (LPHL) customer. The type of customers you have will largely determine how successful your business will be.

Most companies (product or service-based) can tell you with certainty which customers make a profit.  At the Gross Margin Level and even further down the line on the P&L.  Over the course of my career, one of several metrics I used was account profitability.  [profit/total sales ] – For Each Account.  This would answer the quick question: ‘ how profitable is this account?’  As you might imagine, about 20% of the customers contributed the lion’s share of profit.

Ultimately we would categorize them into 3 buckets:

 

1.  High Sales Volume – High Profit

2. High Sales Volume – Low Profit

3. Low Sales Volume – Low Profit

 

The main question we asked ourselves was, 'how do we get 2's to be 1's?'

To answer this, we needed to make some changes to how we collected data. The goal was to see on a job by job level all costs. Gross Margin was easy to get. Getting the ‘cost of doing business with them’ was harder. We could quantify some things and others were hard to tie to a particular job. Surprisingly, below-market pricing was not a large factor for this group.

 

Ultimately we came to a place we considered good enough. When we stepped back we saw some low-hanging fruit [things we were not managing well and could change quickly]; most, however, involved meeting with the customer. Remember, our goal was to move 2’s to 1’s.

Many of our customers in that group had less than optimal ordering patterns. Lots of smaller run sizes, more frequently. Often times you build pricing models to cover the bulk of your orders.

 

The 20 % we planned to be odd orders, grew to about 35%. Which pushed our profit down by over 50%. Ouch. We met with our customers to discuss carve out programs where we could manage those smaller runs differently. The result was better for the customer in terms of service. Our cost to serve these customers dropped and profitability started moving in the right direction.

 

The third group [low sales-low profit] was a little easier to deal with.  This group of customers was consistently what I called “price shoppers.”  They would often get several bids and then have 2 or 3 iterations of playing one supplier off another.  On top of that, the jobs coming in were never as advertised.  Often deviations from the specifications and schedule changes were common. 

 

All of which have a direct correlation to profitability. Once we regained control over missed dates by the customers and stopped playing the pricing game, things improved.  I was prepared to lose many of those customers.  Those that were never looking for a partnership with suppliers.  We did walk away from business and some clients chose to leave us.  Not as many as I had estimated.  Roughly 40% of the customers in that group stayed and were okay with changing the way we worked together.

 

Categorize your customers/clients.  Review the lists on a regular basis.  This one is important…include people from across the organization.  It is easy to rely on those who are closest to the accounts.  You have heard the saying about seeing the forest through the trees…it is real and good advice.

We realized we needed a better review and account management process. We established a committee of employees from various parts of the organization.  They were tasked with reviewing accounts in all 3 groups, quarterly.  By having a diverse group and a good cadence of review, we did not find ourselves back in that unbalanced customer mix.

 

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