All Customers Are Not Created Equal
When economic times are tough and positive top and bottom lines are hard to come by, whether you’re a grower or a retailer the normal response is to try to attract and convert every possible and potential customer, anyhow and anyway. There’s that old “sales cure all evils” adage that’s been chanted as a mantra and blindly followed by most of us for years. Top-line sales have been seen as the cure-all to every problem we encounter. And don’t take me wrong, sales is one of the most important factors and focuses that we need to be vigilant about — and they’re even more important when they’re difficult to get.
Profitable vs. Unprofitable
Where I differ from many people out there is that I differentiate between profitable and unprofitable sales. Difficult as it may be, you should seriously consider abdicating or not chasing the unprofitable ones; in fact, the unprofitable sales may actually be impeding your ability to grow your profitable sales. If the current economic environment dictates that sales growth is going to be tough to achieve, you’d better ensure that the sales you do have are profitable ones.
Consider for a moment that your best customers account for 20 percent of your sales volume and that your S&GA (sales and general administrative expenses), the actual amount spent or invested to get and service these sales, is 5 percent of your resources. Resources are not only the time, effort and people invested in performing the actual selling, but all of the promotional programs, special pricing and discounts, administrative support such as deliveries, special packaging or packs, P.O.P. signage, late receivables and accounting follow-up, and marketing costs.
Then, consider that the bottom 10 percent of your sales volume probably costs you 20-25 percent of your total S&GA expense. If you ran a pro forma profitability analysis by account, which do you think would produce the greatest return on your investment? And what is the sales potential if you were to consider reallocating the time, effort, people and investment currently spent on the bottom 10 percent of your accounts to your more profitable top 20 percent?
By reallocating these resources, how much more volume could you generate with the top sales producers, just by increasing your focus on them, though at the expense of the bottom performers? I’d guess that while you might not make up all of the volume lost by decreasing the attention and resources to the bottom accounts, you’d capture a large percentage of it with increased sales from your top accounts. And, these traded sales would be far more profitable to you. While the percentages I’m using might not be exact for your particular business, I’m confident that you’d find the ratios I’m using illustrate the same kind of relationships you’d find if you ran the numbers on your operation, whether you are a grower, a grower/retailer or strictly a retailer.
Laying it all out
This same approach can be applied to wholesale and retail customers, as well as to products. For a grower, look at it in terms of individual crop productivity and profitability, analyzing the bench space commitment, the initial component costs, the fertilizers and insecticides applied, the number of times the product is handled and the prices you have to sell each crop for. From a retailer’s perspective, what are the profitability tradeoffs in inventory to sales ratios between products and categories, the advertising and marketing expenses in generating these sales, and your ability to better service needs of your core (vast majority) customers?
I would expect that, if you considered these assumptions without emotion, you’d most likely think about changing some of the things you currently do in managing your sales. But taking action to implement some of these changes in management philosophy is hard to do because there’s risk involved. However, I consider this a prudent risk, as the potential for positioning your company for short- and long-term profitability is necessary to ensure your success.
Before you can begin to analyze profitability by customer or account, by product line or by crop, you’ll need to fully allocate all of your resources to their respective profit centers, including all direct and indirect fixed and variable costs, internal overhead, payroll and accounting charges. While this may seem a monumental task, I think you’ll find that, simply asking your employees for this information for their areas will give you a number close enough to start making the hard decisions. There are also a number of good Customer Relationship Marketing (CRM) or “one-to-one marketing” software programs available that will allow you to capture this information systemically.
Surgery for Survival
If a patient has a gangrenous limb, the doctor may have to amputate it to save the life of the patient. Likewise, unprofitable sales jeopardize the existence of a company and sacrificing these sales may be the only viable option for long-term success. Being able to focus more of your resources and attention on your profitable accounts, categories and products ensures profitable growth. You use Return on Investment (ROI) analysis when you make capital investments; now it’s time to use the same thought process and methodology in assessing your Return on Customer.
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