Customer Evaluation Leads To Profit Improvement
Many dealers find themselves in the position of managing the size of their teams in direct proportion to sales – as sales grow, they add more people. In the latest addition of “Evaluation Leading to Action”, we would like to suggest a different approach. Let’s think in terms of what our real mission is, to make profit.
We need to look at each customer at a more granular level. Sales dollars alone don’t paint a very accurate picture of the value of the customer; in fact they may be one of the worst ways to measure their value to you.
Let’s start by looking at the gross margin dollars generated by selling each customer. Then look at the expenses associated with making those sales. We are paying a sales team, (outside and inside) to support the customer. When we are delivering those sales, we are also extending credit to the customer.
We find that within most dealers’ overall business, there are customers that may provide a decent level of sales, but are “demanding”. They ask for a lot of emergency deliveries of small quantities, they always have returns to be picked up; they pay slowly but try to take prompt pay discounts, etc. You know who they are! Questions to consider:
- Do you feel the squeeze to hire more people, because you are juggling being able to fulfill certain customer requests?
- Are you focused on the wrong thing? Sales don’t always mean profits… all customers are not created equal.
If you answered yes to those questions, here’s one more:
- How would your results change, if every customer was a profit contributor and you sized your operation accordingly?
A robust evaluation of customers will reveal whether or not each customer is actually providing you with an acceptable return on your efforts. You will most likely find some that are not. In fact, there are likely some customers that are actually costing you more to service than you make in gross margin.
Once you have completed your honest evaluation, you can develop your action plan. Take a “we have nothing to lose” approach:
- What would it take to change a given customer from a negative to a positive contributor to your bottom line? Raising their prices?
- Can you manage the mix of products they purchase from you better?
- Do you need to revise your credit terms with them?
You must have resolve, this is a sticky situation… you want to keep the customer, but only if you can change things so you make money doing business with them! If you can’t turn it around, or they are hopelessly negative, it’s time to end the relationship.
We suggest that before you make another hire to keep up with customer requests, evaluate each customer carefully. You may find that you already have enough employees & trucks to service all of your profitable customers!
This article was written by Tom Ford & Jack Leary, Partners at Impact 180 Consulting Group & Lumber Contacts Inc. Feel free to contact Tom or Jack at, firstname.lastname@example.org, email@example.com.