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18 FEDA News & Views continued on page 24 Are we transferring product at our own expense? Have I hit a nerve yet? Good. We have a finite amount of resources in the company. We should not waste them on customers who are not contributing. A good strategy is to require minimum orders for both credit purchases and delivered product. Do not order in special products for C customers. They get to buy what we have on the shelf. Above all, we do not transfer product at our own expense. One of the final suggestions is to quit spending sales dollars on them. For those of you with an outside sales force, quit call- ing on these customers. Remove commissions on these cus- tomers, and make them house accounts. By removing the com- missions, you remove the favorite word in the sales vocabulary used to describe an underperforming customer—potential. Serving B Customers The middle group, let's call them B customers, is a different animal. They do have a negative contribution to net profit, but I wouldn't want to lose them. As mentioned earlier, they provide us the volume to purchase more efficiently and allow us to enjoy certain economies of scale. Some slight adjustments to how we handle this customer group will allow many of them to rise up to positive contribution. Most of these customers have a decent gross profit volume. The real trouble occurs in the frequency of order. We may find ourselves process- ing several low-dollar orders in a sin- gle day. If we could get them to consolidate orders to once a day, they would slide up the profitability scale. This type of discussion will need to come from someone senior in the organization. They can speak in terms of reduction in the cleri- cal costs of PO generation and payment processing. Another strategy is to look at how you handle special orders and transfers for this customer group. I would ask this custom- er to bear the cost of expedited handling. In addition, I would be more apt to suggest that the customer accept a substitute rather than ordering in a special item. While we are talking about specials, make sure that we are getting a high margin on the product. We are spending company resources to bring this in. Be strict with your return policies and be mindful of internal costs. Finally, I would look at modest price increases. This is where a good pricing matrix guru can come in handy. Look for subtle increases to less popular items. You should be able to raise your overall margin by 1-2 percent. Now we arrive at our best customers. To stay consistent, and a bit boring, let's call them A customers. These are the folks that make a positive contribution to our net profit. We love them. We need to tell them we love them. I'm serious here. If we lose one of these customers, it will often be the next most expensive sale we will ever make. We will throw all kinds of deals at them in order to woo them back. Unfortunately the cash impact of these deals will be felt for many years to come. Let's not lose them in the first place. FOUR IMPORTANT LESSONS ON ANALYZING DATA See Page 26 Finding the Right Balance By Brent Grover, Author of In Search of the Perfect Customer Customer profitability can be depicted as a three-legged stool: margins, order size and cost to serve. A profitable customer is usually a balance of the three factors. For example, if order size is small, higher margins and lower cost to serve compensate for it. Measuring customer profitability and figuring out the root causes of profits and losses is absolutely necessary for efforts to optimize pricing. High-profit customers don't always have high margins. Excellent results may be a combination of large order size and low cost to serve. Large-loss customers sometimes have high margins; losses may be caused by small orders and high cost to serve. We can't jump to conclusions about questions such as pricing until we understand the situation with each customer. Ranking customers in order of profitability, from most to least, makes it easy to divide them into four groups: high profit, low profit, small loss, large loss. The profitable customers make up the top two quadrants, large and small profit. The money-losing customers the bottom two, small and large losses. The action steps for customers in each quadrant are quite different. To learn more, order your copy of Brent Grover's book In Search of the Perfect Customer by visiting NAW online at http://www.naw.org/perfectcusta. cost to serve. A profitable customer is usually a balance of the three factors. For example, The Cost to Serve continued