Make the most of profitable smaller customers

How do you manage those many smaller customers that routinely place profitable orders?

1. We don’t do anything special based on customer size or profitability.
2. We look for ways to protect and build the profitable relationship.
3. We don’t know because we do not track net profit by customer.

We suggest that our distributor clients let us divide their customers into two groups, larger accounts and smaller accounts. We then subdivide the two size groups into two subgroups: profitable customers and unprofitable customers. Using a size/profit matrix with four boxes, we assign each customer to a box: larger profitable customers, larger  unprofitable customers, smaller profitable customers and smaller unprofitable customers. The four boxes[1] are “big winners”, “big losers”,  “small winners” and “small losers”.

The size/profit diagnosis for big accounts is fairly simple. Orders from some large customers aren’t profitable. A distributor can lose a lot of money doing business with a big loser. The necessary therapy is clear: these accounts need to be turned around if possible. On the other hand, doing business with some large customers is very profitable. These big winners are the distributor’s crown jewels: they must be protected and nurtured at all costs.

Smaller customers present somewhat of a dilemma. It’s tempting to do nothing. Individually, unprofitable small accounts don’t “move the needle” very much. But, taken as a group, the losses from dealing with small losers can be a serious problem. The loss situation can be turned around using the right policies and procedures.

Profitable smaller customers are somewhat of a conundrum. This letter will review three critical steps that distributors can take to manage small winners: protect the customer, grow the customer and build customer profitability. These three actions determine how profitable – or unprofitable – your small customers will be.

Protect the profitable small customer

The profitable customers must be protected from competitive inroads.

• Smaller accounts, even profitable ones, are often overlooked by the sales reps assigned to them. Most outside reps earn most of their income from a handful of large customers. Those accounts get nearly all of the love. Your small profitable accounts may get more attention if assigned to a proactive inside sales rep.
• Small profitable “house accounts” who get no attention may feel taken for granted by the distributor. These customers are vulnerable to competitors. Consider assigning them to proactive inside sales reps or to a well-designed direct marketing program supported by customer service staff.
• Service for profitable smaller accounts must be maintained at a high level and pricing on new items needs to be competitive. Customer surveys such as Net Promoter Scores[2]  give useful feedback about what must be done better.

Distributors need to know the operating profit generated by each customer and customer segment. Grouping customers by size and order profitability pinpoints the smaller customers who form a stream of steady profits and growth opportunities.

Grow the profitable small customer

Some of your small customers are very large customers for one or more of your direct competitors. Other small customers are already giving you all of their business. It’s critical to find out how much share of the customer’s “share of wallet” your company enjoys.

• Small winners are already placing profitable orders with your firm. The combination of gross margin percentage, order size and cost to serve is working in your favor. If the relationship is good, the obvious goal is to find out what else this account could be buying from you.
• If the sales rep assigned to a profitable small account is neglecting it you may have two problems: (1) missing out on a profitable business opportunity and (2) the account is vulnerable to the competition.
• If a profitable small customer with growth potential is a house account, reassignment to a proactive inside sales rep may generate more profitable business as well as protect the account. For less promising customers, consider creating an effective direct marketing program supported by a capable customer service team.

Profitable small accounts already know your company and have chosen you as a supplier. Of course it’s much easier to sell to an established customer than to sell to strangers.

Enhance customer profitability

If you can indentify where these nice profits from smaller customers are coming from, a tantalizing opportunity is before you. First, some of these high-profit small accounts could be developed into big accounts. Second, order profitability on these smaller customers can often be further enhanced by thoughtfully reducing cost to serve and building order size.

• Price optimization using a strong strategic pricing program is always a good recommendation. Even profitable accounts may have “pricing outliers” – below-market pricing on some items.
• Order size is a profound indicator of customer profitability. Profitable small accounts – small winners – are probably already placing good-sized orders. Building order size even more is always smart business.
• Cost to serve varies widely by individual customer. For smaller accounts especially there is no room for providing expensive extras that the customer doesn’t want or need. Examples include a sales rep who doesn’t add value, credit cards and premium freight.

It isn’t practical for management to personally intervene with most of the distributor’s small customers, even the profitable ones. Price optimization, building order size and cost to serve must be managed through the distributor’s sales policies, business processes and compensation programs.

SOURCES:

[1]  The names “big winners”, “big losers”, “small winners” and “small losers” are descriptive but they are a bit harsh. One of our clients calls them “big winners”, “big opportunities”, “winners” and “small opportunities”.

[2]  Net Promoter Scores are a popular tool used by marketing experts to evaluate customer loyalty by asking how likely the customer is to recommend a supplier to a colleague.