A recent discussion among some owners focused on the nature of customers, specifically how some customers are worth the time and investment and some are not.  Zack heads up a $20M+ medical devices company.  They recently went through a purging of sorts with their customer base.  In essence, they look at costs and profitability on a customer basis.  When faced with an investment decision, they look at the the cost structure to serve a specific customer, and the profit that customer delivers.  Investment decisions are made accordingly.

In other words, they consider capacity and profitability by customer to make investment decisions about that customer.  Are they worth having as a customer?

The analysis Zack and his team went through ended up with them pricing out of their customer base about 1/3 of their total customers.  The return on the low margin customers did not justify the time and cost investment to serve them.

By increasing prices, low margin customers left.  Capacity was increased.  Gross margins by customer improved; gross margins overall improved; the entire organization is able to do more in less time because of the cumulative efficiencies achieved with individual customers.

The group summarized some what to look at on a customer-by-customer basis; situational questions to consider are:

• How good is the relationship with the customer?
• What percent of capacity of does this customer use; are they profitable?
• Is the customer a good fit with our capabilities?
• What amount of capital is needed to serve this customer?

Positive answers to the questions leads to good decisions on serving the customer, driving growth, and efficiently and profitably handling the growth.  Some additional guidelines to follow include:

• Be diligent in accounting for the soft costs to handle an account.  What internal resources are needed to keep the customer happy?
• Use loaded burden rates per person when calculating the costs to serve an account.
• Calculate accurate sales costs to acquire an account.  Calculate accurate sales costs to retain an account.

The bottom line to evauluating whether all customers are good customers is that, if objective in your analysis, the bottom line improves.