Customer Contribution - The Bakers Dozen
I would like to thank-you for visiting “The Baker’s Dozen - Strategies for Moving Customers into the Profit Zone”. Since the early days of transaction-based costing, Distributors have struggled with what to do with those customers who were just slightly below the profit zone. As I speak to distributor managers around the country, I relate the story of one aggressive young manager who literally called his marginal customers together for one last meeting where he literally (and brutally) “fired” them. If only I could have caught him in time, we would have put together a strategy to move these people into the profit zone. Hopefully this will help you as you plan to move more customers into the black ink – the Profit Zone.
You can minimize transaction time and expense when dealing with big and small customers alike by building a Top 200 Order Form. The form lists the 200 products that receive the largest number of “hits”. This information should be available from your business system. Some distributors use these forms to simplify the turn around time at their sales counter, still others have added bar coding to reduce the time required to enter the part number. Either way, the result is less transaction time. The goal is; ask marginal customers to use this form to reduce the workload on customer service, counter and inside sales people.
Promoting “faxed in” orders (through incentives, promotions or offering customer prizes) smoothes out the peaks and valleys in order entry. Customers like it because it eliminates waiting time. One customer told their distributor salesperson, “This simplifies my life because I now have a record of who placed which order and when.”
Do I need tell you the cost of postage adds up? Consider asking your business software provider if you can automatically invoice via email or fax. The transaction cost of handing a customer with two purchases a week will drop by 50 Bucks! Add to this the cost of envelopes, printed forms and labor to handle them – before long you are talking about some serious money. And, the A/R days outstanding number doesn’t change one bit.
Eliminating terms for customers who fall into the marginal or no profit zone can be a “no brainer”. If the issue is not enough sales volume, offer the customer a rebate instead, but only if they grow to the size that you find attractive. If they simply don’t do enough business to grow to a sales volume you find profitable, the extra few percent will move them closer to the profit zone.
Many companies assign an account management fee just for the privilege of doing business via an open account. Before you shake your head, analyze the credit cards in your own wallet. If you find a gold card, a corporate card, or some other premium offering – you are paying for the honor. Why shouldn’t a marginally profitable customer pay you to keep their account open?
The distributor trade publications are full of articles covering matrix pricing. Distributor associations tell me they covered matrix pricing at some meeting back in the 1990’s. Yet I find the people on the front lines of distributor sales and pricing lack the solid fundamentals to make matrix pricing work. Here is an example: One distributor client had a special machine builder customer who used automation products in large quantity. They purchased a minimal amount of production safety equipment for their own in-plant use. They bought both products at the very best possible level. Even though the quantities purchased didn’t justify this and the usage pattern didn’t justify the price. Instead a customer service rep had reasoned – this customer is an OEM, they get OEM pricing for EVERYTHING.
The typical telephone procedure used in Wholesale America puts very profitable and not so profitable customers together on the same phone line. Often we find our very best (and most expensive) resource spending a half-hour babysitting a customer that doesn’t contribute to our profit picture. Customer service people tell me of customers who turn into the “tar baby” of the Brer Rabbit story. The harder you work to solve their problems the more frequent and trivial the problems become. Guide marginal customers to the least expensive resources.
It’s hard for some people to comprehend, but it really does cost less to process a full carton than to handle a single part. The handling costs are decreased, freight claims are diminished and you make more money. If your company’s most profitable customer wants you to sell a single egg, figure out a way to do so – for others - enforce a no broken carton policy.
This isn’t Burger King; special orders do upset us. Steer marginal customers to standard products. This applies to competitors, friends and fellow employees. If you don’t sell it as a standard stock product – they shouldn’t be buying it from you. Creating and ordering specials and non-stocks is very expensive from a transactional basis.
Distributors are designed for product to come in the front door and out the back door. Reverse the direction and the transaction costs sky rocket. When you make a mistake take the product back – this is honest business. If this is customer error – the customer needs to cover the loss. Lots of folks are scared to death of restocking charges, penalties and other deterrents to material returns. If you don’t completely eliminate the return at least limit it. I would definitely not accept a return for any order under (say) fifty dollars without a 110% restocking charge. And even then you may lose money.
Distributor salespeople offer free delivery on the company truck regardless of order size and regardless of who orders. The (misguided) theory here is; since the truck is going out anyway it doesn’t cost anything extra for just one more stop. My own observation is it takes the average delivery driver at least 20 minutes to park, grab the order, get the signature and move on – more time if the stop is a manufacturing facility. Assign a delivery fee – you can always wave it for great customers.
Training costs money. If you offer technical training courses - charge. Experience tells us; customers cancel out or no show fewer times if they have been charged a nominal fee for the training. I like the concept of awarding training tokens to very good customers. Put a value on each token. And, if they don’t earn the tokens – sell them some.
This one doesn’t work for all products or every industry, but a display board in your counter sales area can save lots of time and streamline the transactions with those marginal customers (and good customers, too). The board has a family of products attached to it so that a customer can compare her/his old part to the new ones without opening cartons or asking your counter people for time consuming cross references. Want to see these in action? Stop by your neighborhood Home Depot or Lowe’s, they figured this out a long time ago.
Thanks for spending this short time with us. We at River Heights Consulting always look forward to your comments, suggestions and just plain old fashion conversations. Drop us a line or give us a call. It costs nothing for a quick chat.