Issue link: https://www.e-digitaleditions.com/i/480616
March/April 2015 37 Redefining the standard... Globe Food Equipment Co. www.globefoodequip.com | 800.347.5423 F l o o r M i x e r s continued on page 37 Exhibit 2 An Analysis of Customer by Profitability Category Customer Number of Percent of Dollar Percent of Profit Per Category Customers Customers Profit Profits Customer A 150 15% $450,000 100% $3,000 B 150 15 157,000 35 1,050 C 350 35 45,000 10 129 D 350 35 -202,500 -45 -579 Total 1,000 100% $450,000 100% $450 where around 1,000 customers. The top 15 percent of those customers are the 150 A firms. On those accounts, the dis- tributor produces all of its operating profits, or $450,000. This translates to about $3,000 of operating profit per customer. As noted back in Exhibit 1, the typical customer produces an operating profit of just more than $450. Clearly, the profitable customers are not just profitable, they are really profitable. At the bottom of the spectrum, the least-profitable 35 per- cent of the firm's customer base, represents 350 accounts. On these, the firm loses 45 percent of its operating profit or $202,500. This translates to a loss of about $579 per customer. While each individual firm will demonstrate a unique pat- tern of customers and profits, there is one overwhelming conclusion that can be drawn across the board. A significant group of customers generates losses rather than profits for the distribution organization. Modifying that relationship is essential to generating adequate profits. Increasing Profits by Working with Customers Increasing customer profitability requires both a system of measurement and a willingness to take specific actions based upon the results of that system. FEDA has developed a system to help its members measure the profitability of different cus- tomers. The process is both quick and easy. The challenges in developing a system have largely been eliminated. The next challenge is to commit the time and effort required for imple- menting change. The challenge in the future is to develop the proper mindset to deal with the customer profitability issue. While custom- ers cannot be controlled, they can be managed in a way that drives higher profits for both distributors and the customers themselves.