Do you know which of your customers are losing you money?
May 21, 2019
Of course we would all like to think that every customer is making the business money and from a gross margin that should nearly always be the case. But in practice, once overheads and cost to serve are accurately allocated, there are likely to be a nucleus of customers with which you are trading at a loss; and the tighter your margins the more loss making customers you’re likely to have.
Sales teams will be acutely aware of selling (or gross) margin; some sales teams even know contribution down to EBITDA level, based on a standard distribution of overheads. But this assumes that those overheads are spread evenly across the entire customer base. But the truth is that some of those valued customers will be far harder to serve than others and as a consequence the true spread of overheads is greatly weighted to those that,
- regularly pay late;
- require regular phone calls and visits to secure a payment;
- raise high volumes of disputes or issue high volumes of deductions,
- demand bespoke invoicing such as consolidated schedules and
- many more time consuming tasks.
Once we take the cost of these special needs into account, would these customers still be generating the required level of margin contribution to satisfy the shareholders? Do we even want to continue to do business with these customers?
One way to look at this is that these customers are too demanding and should therefore pay a premium. But there is another side to this. Customers are the reason why businesses exist. Its therefore important to also consider where we can reduce the cost to serve and in the process give the customer what they need. For example, how much of this cost is down to the customer and how much is down to the seller? For example:
- Could the seller improve processes and customer communications to improve invoice accuracy?
- Are there technology solutions that could be deployed to replace some of the expensive manual solutions that businesses put in place to serve specific customer demands?
And where the customers actions are costing us too much, do we really do anything to actively address this? If we don’t tell our customers the size of the problem we can hardly expect them to care about helping to fix it?
Every Credit Manager will be intensely aware of the cost of credit but far too often companies keep this secret confined to finance for fear that the sales department won’t want to hear that their favourite customer is actually losing the business money. Maybe that’s not entirely fair, for it implies that companies actually make the relevant calculations - in our experience few companies do.
So here are five practical things that a business can do to optimise cost to serve and maximise profits
- Analyse cost to serve and profitability at a customer level
- Identify the high cost areas of the ‘cost to serve’ equation and develop a plan of action to address these
- Discuss any high-cost customer specific demands with your customer and try to come to an understanding about how you can work together to lower the impact or perhaps share the cost.
- Consider process and systems solutions that allow you to meet customer demands for the lowest marginal cost
- Adapt business strategies to make better use of the available resources in sales, fulfilment, operations and collections to realise efficiency savings
We can help organisations to map out and quantify cost to serve at a customer level to enable a clearer picture of who is making the business money and who is losing the business money. With this knowledge a business is better able to drive margin improvement by addressing those practices that cost a disproportionate amount of money compared to the reward. It will also help to shine a light on who your most valued customers truly are!
If you would like to know more, please call Niall Cooter or Stephen Tebbett