Peer to Peer Advisors

Manufactuers Only Peer Groups

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Not All Customers are Good Customers

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.

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Think About Giving Up the Middle Ground in Your Planning

We were talking about planning, specifically annual strategic planning.  It frequently seems to be a laborious process comprised to some degree of guesswork.  The overriding questions usually are: Where do we want to be a year from now? and How are we going to get there?

One group of owners settled on a different approach.  Instead of thinking in terms of next year, or 2-3 years out, they are going to set big goals 5 years out or more, and everything else is in 90 day increments.

The reasoning is simple.  The big goal(s) speaks to the vision for the business.  It could be exceptional growth, sale of the business, succession to the next generation, whatever.  The benchmark is that it is big in terms of optimal outcome.

Getting to that goal is a matter of immediate steps in short term horizons, and adjusting as you go.  Engage employees and management on short term (90 day) goal development and tracking, being sure the short term goals align with the longer term vision (5+ years) for the business.

Focusing on shorter term activities is how businesses operate.  As Tony said in the group discussion, we are all in survival mode in one form or another.  We look at the current customer base, new opportunities that can close in the short term, and the resources needed to deliver on time, with top quality, and within budget.

So, give up the 1, 2, or 3 year middle ground planning horizon.  Instead, know the ultimate outcome.  Then overlay a 90 day structured process of goal setting, measurement, tracking and discussion.  Plans are dynamic and the short term activities continually adjust based on the results.

Using this approach helps organizations always knows where they are in the immediate time frame, and makes sure that where they are going aligns with the long term goals.