Want Higher Profits? Choose
Your Customers Wisely

by Lynn Daniel

The economy is growing in fits and starts. What business development strategy is appropriate now? The answer is aim. Aim your resources, be they sales and marketing dollars, manufacturing capacity, or development efforts toward those customers with whom you have the greatest chance of generating profitable sales.

Don't CEOs do this already? No. Too often, managers believe any sale is a good sale. They do business with customers who were never profitable or have become unprofitable over time. I am currently working with a client in which the company's sales are growing but profits are not. The reason: Too many unprofitable products and customers. This company's aim is off!

The important first step in most companies will be to sell an "aim" strategy internally. Often, this means first establishing that customer profitability matters to the company's performance. Just getting an order without regard to profitability is not good enough. Selling an aim strategy internally also means defining what customer profit expectations are. Employees need to know the profitability benchmarks so they can determine how to improve customer profitability.

Other steps to take:

  • Define what your company does well. Profitability depends on creating a match between what your company does well and what the targeted customers want. What strengths does your company possess and what really makes your products and services different? Answering these questions helps you begin to understand why customers really do business with you. Look beyond internal perceptions; ask customers which services and products they value and why.

  • How profitable are your customers? To improve profitability, a sound financial system for determining customer profitability is essential. Start with the gross margin but go beyond it. Sometimes, customers create many costs that become hidden. The customer who requires extra handling of an order, consistently pays late, demands (and gets) extra engineering support, or costs you in a variety of other ways can be unprofitable.

    Look at your lucrative relationships. What makes these customers profitable? What products and services do they purchase? What other patterns are apparent? Repeat the process for your customers with the lowest profit. How do patterns differ between the two groups? Look for more customers with characteristics similar to your profitable ones.

  • Take action. Sometimes, this means firing a long-time customer. Sometimes it means taking the extra step for that targeted customer because this is a customer for the long haul. Be certain to take action to eliminate those you can't afford and keep those you can't afford to lose.

Here's an example of how this strategy works. Sales and profits had declined at a specialty chemicals producer in North Carolina that I'll call Climate Chemicals. Management decided things had to change. They began to aim their marketing, development, and production resources toward more profitable customers. The improvements were noticeable:

  • Eliminating those customers that consumed an inordinate amount of technical resources reduced the company's extraordinarily high laboratory costs. This step freed up lab resources to devote to new product development. These additional resources resulted in two new products being developed -- products in which their targeted customers are very interested.

  • Production costs declined. By focusing on those customers with more desirable order quantities, Climate increased the average batch size and reduced the number of batches. Labor requirements decreased. Raw materials costs, because the company was dealing in bulk orders, declined as well.

  • Management was better able to listen. When you try to serve many different types of customers with widely varying needs, there is a lot of "noise" from the marketplace. By focusing on those customers that Climate was best able to serve, managers could listen better to what customers were saying. This was part of the reason for the new products. More will be coming in the future.

Aiming your resources is critical in any economic environment. Achieving a clear aim in your company is especially important when growth opportunities are harder to come by. Keeping your company clearly focused on profitable customers and opportunities will help ensure that your company is profitable, no matter how the economy fares.


Lynn Daniel is CEO of The Daniel Group in Charlotte, N.C. which provides strategic planning, research, and training services to middle-market companies. He has been quoted in The New York Times, Inc., Business Week Frontier, and many other publications. Daniel can be reached at 877-967-4242 or lynndaniel@thedanielgroup.com .

Many more articles in Performance Improvement in The CEO Refresher Archives

   


Copyright 2005 by Lynn Daniel. All rights reserved.

Current Issue - Archives - CEO Links - News - Conferences - Recommended Reading