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Analyzing Account Profitability
FORM Magazine, Feb. 1989
BY J. BUSTER WEINZIERL, CFC
We must be knowledgeable about the cost of our products and services. Too often we make assumptions that tend to spread costs over all products or customers. This is wrong.
I believe we penalize better customers to protect those who don't measure up. What can be done?
We have developed a plan at Belknap Business Forms that we believe can be used by distributors as well.
First we did a self-assessment. Were we meeting our responsibilities as a least-risk supplier for our customers? If not, changes had to be made. People who live in glass houses should not throw stones.
We then began our customer profitability analysis by defining the attributes of a good customer:
- Communicates clear and precise information.
- Pays bills within terms.
- Is morally responsible.
- Is non-abusive.
Our next step was to find a way to measure each customer. We asked our order entry. personnel for a list of customers from whom they often need extra explanation of order specs. The list appeared quickly. Order entry staff members contacted these customers to work with them to improve their skills. Some customers responded favorably, others were defined as problems. A review of problem customers determined how much extra time was spent on one of their orders. We figured the cost of this time should be added to every quote we gave these customers.
We also reviewed our accounts receivables. We defined late-paying customers and those who always require prompting. We again measured extra time and phone calls and risk factor for financial exposure, and came up with an added cost. This cost's was added to all orders quoted them customers.
Sometimes a customer is wrong or partly wrong but refuses to accept responsibility. We found these customers were less profitable than our better accounts, and credits issued were, on a percentage basis, much higher. Our goal was to make these accounts as profitable as the others so we included a price adjustment.
We also measured use of our 800 numbers. We reviewed the amount and type of activity received by phone compared to the number of orders received. (We handled quotations differently.) The added customer service activity was measured and a charge was added. It was not our intention to charge for every aspect of customer service. However, we have a basic customer service program and when taken beyond what we consider reasonable, defined by our core customer base, we are being abused.
We measured the quotations that turned into orders. If we found we provided many quotes and no orders, we called the customer to find out why. This discussion let them know we were monitoring quote activity. In some cases quoting ceased; in others, we received added business. We made no adjustments on our quoted prices in these cases. Simply monitoring the quote activity took care of most of the abuses in this area.
Some customers were found careless in all four areas and incurred a large additional cost for doing business. Twenty percent of our customers were careless in at least one category. Prices quoted to these customers now reflect our cost of doing business with them.
New accounts or new business do not necessarily fall into one of the four categories. Experience with a customer determines how that customer measures up.
Review the cost of doing business with each customer - each must be a profitable account - and avoid spreading abnormal costs over your entire customer base. When developing your plan, be sure to check with a lawyer.
Our goal is to promote a professional industry where the strong survive. We should reach the point where we may not do business with someone at any price.
J. Buster Weinzierl, CFC, is president of Belknap Business Forms in Westfield, N.Y., and a member of The FUTRENDS Group.