One of the members of my Vistage CEO peer group recently noticed that while the number of customers was growing, the turnover and certainly the profitability didn’t seem to match up.
He did some checking and using the ubiquitous Pareto analysis (80:20 rule) he discovered that, as usual, the top 20% of the customer list on his sales ledger accounted near enough 80% of sales turnover and much the same for profitability.
It is a simple analysis but it seems to me that not many business leaders make the check. The member of my group did a little more searching and discovered to his horror that not only were 80% of his customers doing, in general, little business on a regular basis with the business, but they proved to be the ones that caused the most problems.
This group placed small orders and not on a regular basis, they were slow in paying and had the majority of complains, many of which seemed to be allied to the payment date.
In total the business had around 250 customers and he made the brave decision to prune the list in order to deal with larger outlets and to reduce if possible the problems associated with the small ones.
This meant that he would reduce the customer list to about 50 so what to do with the balance? He didn’t want just to stop dealing with them; rather he wanted to arrange something that would keep them as a customer in some way but without the hassle of everyday contact.
His business supplied food products to a range of outlets; small retailers direct in some cases, small and larger wholesales and, most importantly, major high street supermarkets.
He made contact with one of his larger customs, a major wholesaler in the field, and offered then a deal whereby he would pass over about 200 customers at arranged a pricing structure to suit both sides.
It worked remarkably well and the consequence was that he was able to deal with the significant customers in his business on a far more profitable basis and giving better service as well.
Pareto still applied of course and eventually he reduced his customer list even further with even more success.
Naturally you can go so far and no further because at some time the customer list would be reduced to single figures, which would probably, imply severe vulnerability a most undesirable factor.
The fact is that there are very good customers, good customers, average customers and some about whom we wonder why on earth we deal with them? The question is, what are we going to do about it?
A judicious look at your list of customers will almost certainly throw up some that are problematical, small quantities bought, poor and from Amazonlate payers and are the most adept at complaining.
The cost of these customers is not restricted to their lack of contribution; it needs to cover all the time taken by sales staff, dispatch departments, accounts departments and all the other people associated with satisfying the customer. The results can be a shock.
Another of my members was dealing with a very large and extremely demanding major client who gave him a very difficult time. He did a cost analysis and discovered that while the business was adding significantly to the top line, the actual value of the customer was very low indeed.
He took the really brave decision to stop supplying them and this to their considerable amazement. They came back to him in six months or so and on terms that made much more sense.
The old adage of “Turnover is vanity, profit is sanity and cash is king” always applies and a careful look at your customer list can make significant improvements to your performance.
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