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Segment Your Accounts
FORM, March 1994
Companies Learn How to Profit From This Valuable Management Tool
BY SHARON McLOONE
Every company is intuitive about which clients are profitable and which are problematic. In most cases, money-making clients get special treatment when it comes to customer service, shipping and rush orders. And that's smart. Experts say a management philosophy based on the premise that all customers should be treated with an equal level of service will inevitably drag a company into lower profits.
A company becomes more efficient and, in turn, increases revenue by segmenting and streamlining its account base according to profitability. Many companies are intimidated by a myth that it's necessary to hold an MBA to perform the ultimate financial analysis. Bruce Merrifield, president of the Merrifield Consulting Group, Chapel Hill, N.C., recommends avoiding "analysis paralysis" with a simpler approach-examine accounts one layer at a time. "A quick and dirty approximation to start off with will put you on the right track," he says.
Divide accounts into three groups, according to Merrifield-the top 20 percent that generates about 80 percent of a company's profits, the 70 percent that usually breaks even for a company, and the 2 to 10 percent that lose money for a company and have a high "hassle factor."
Identifying profitable accounts is "systematic and simple," according to Albert Bates, president of the Profit Planning Group, a management consulting firm in Boulder, Colo. "You can either look at sales or gross margin dollars, but the most effective way is to do a full costing of each account." To do this analysis, you should track the services and products provided for each account. In addition, examine the cost of truck shipments, telephone sales calls, visits and paperwork. "If you're sending a truck to a particular account and the cost is $20 per trip, and the account orders in bits and pieces requiring 50 trips a year, $1,000 could be much too expensive for your return on investment from the account," according to Bates. Bob Butterly, CFC, president/ general manager of National Graphics Company, a distributorship based in Denver, runs a monthly analysis and ranks each order's cost. Then a sales rep reviews the report to ensure no losses resulted.
Don't fall into the trap of thinking that high volume accounts are the most profitable, says Merrifield. "Those accounts may buy a lot and contribute to sales volume, but kill you on the cost of the transaction, " he says. "A company should invest in activity-based costing and cost out every order or job that it does."
Next, calculate each account's margin contribution for 12 months. According to Merrifield, an account's annual margin contribution is determined by subtracting incremental cost, such as labor and supplies, from the amount of sales. "You'll probably be surprised by how few winner accounts you have and just how profitable they are for you," he says. But margin contribution alone does not dictate the type of service accounts deserve. You should also consider the following factors:
- Growth Potential-Research your accounts, even the small ones. A small account may have great growth potential. Examine the industries your accounts are a part of-growth or decline may be evident.
- Hassle Factor-Some accounts constantly complain, always need quick turnaround, never provide the necessary information for the product and increase the stress level among employees. Hassles cost your company in service time, low morale and turnover. If an account with a high hassle rating is profitable, ensure that the account reps are well trained to deal with potential problems.
- Intangible Return on Investment-Some accounts may contribute indirectly to a company's growth and profitability by offering new ideas that result in sales growth. Even if only a few of the ideas work out and the account is often difficult to work with, it may be a worthwhile research and development expense.
- Reputation-Sometimes it pays for a business to sell to a nationally recognized company. Even if the well-known account does not provide a lot of business, the name recognition may entice other customers to work with you. Be careful, though, says Bates. "A lot of times it's those type of accounts that have someone whose entire job it is to cherry pick you and then pay you slowly," he says. "You can always service a Fortune 500 account one time, drop it and say you've done business with it."
- Product Mix-Make sure the mix of products sold to an account complements your inventory. It can be a financial drain if a company buys products, such as stock forms or a certain type of computer ribbon, for one customer. "Don't think that any order is a good order," says Merrifield. "If the order allows something to be left over to contribute to overhead, then it's a good order."
- Location-The location of an account may make it undesirable to serve or may be an asset. "The guy across the street may cost you less in delivery time, shipping and sales visits, but if that guy doesn't buy much and an account 100 miles away buys truckloads, stick with the long distance account if you have to make a choice," says Bates. "Look for common themes," says Merrifield. "Six out of 10 may be in a certain area that may allow savings on freight and shipping time."
After identifying the three account levels: profitable, break even or losers, re-evaluate customer service and sales. The profitable accounts "need to be treated extremely well," says Bates. "Never disappoint them, give them priority on products and go the extra mile." Company employees should be informed which accounts deserve special treatment. "If employees realize that a large part of their paycheck comes from these accounts, they are more likely to get a job done on time and done right," says Merrifield.
In addition to discovering which accounts are profitable through numerical analysis, Merrifield suggests that the company principal visit an account. "Ask why it does business with you and what type of services and products could be improved upon," he says. "You may be surprised to hear one of your biggest accounts say that it does business with you because someone five years ago opened an account with your company and no one has gotten around to looking for another forms supplier."
Those accounts that prove to be unprofitable should receive a lesser degree of service or if absolutely necessary, completely dropped from the client base. "If you discover an absolutely terrible account, there is always the 'meat axe' approach, which means you just don't call anymore," says Bates. If an account is continuously unprofitable, Superior Business Forms Inc. raises the product price or re-evaluates the type of products it sells to the account, according to Tom English, executive vice president, treasurer and sales rep of the Kalamazoo, Mich.- based distributorship. "A company can carry an unprofitable account only for a certain amount of time before it becomes damaging," he says.
A softer approach is to sit down and work with the account. Most buyers don't want to drain a company and are willing to negotiate, according to Bates. "It's very rare that if a distributor says 'I really like you, but you're losing money for me,' that an account will leave," says Bates. Eight out of 10 financially draining accounts will work with a company rather than seek new suppliers, according to Merrifield.
When Butterly pinpoints an unprofitable account, he starts serving it by telemarketing instead of with sales calls. "If you can save money by saving time, then it's necessary to cut back on a sales rep's travel," he says. "That cuts down on travel expenses and frees up more time to deal with more profitable accounts."
Sharon McLoone is assistant editor of FORM magazine.