Avoiding ‘Service-drain’: Measuring Customer Profitability

Distributors can break down their customers in any number of ways. John Monoky, principal of Monoky Associates, a sales leadership development organization in Toledo, Ohio, divides the customer base into four categories:

• Key Accounts: Distributors have a nice share, but not all of the business. However, there is room for growth and these clients are loyal.

• Maintenance Accounts: Again, distributors have a nice share of the business, but although these customers are loyal, there won’t be significant incremental growth.

• Target Accounts: These are distributors’ competitors’ key accounts.

• “Why Bother” Accounts: The cost of taking care of these customers outweighs the money they pay.

Once distributors segment customers, they can start focusing on the extremes — customers who are the most profitable and those who are the most unprofitable.

“You want to do whatever you can to keep your most profitable customers,” says Pericle. “That means executive calls, quarterly calls, and in-person calls. You want to provide those extra services so it will be difficult to mistake you as the distributor. On the other hand if they’re extremely unprofitable the best approach is to work with the customer to make sure they’re operationally efficient.”

Fortunately, customer segmentation strategies will help distributors determine exactly what makes a particular customer account challenging.

“We call them service-drain customers,” says Lawrence. “You need to figure out what’s driving it. Is it a low gross margin? Is it the high cost to serve? Is it highly erratic buying patterns? Once you figure out what makes the customer problematic you can start finding ways to deal with these individual attributes and see if you can improve things.”

Monoky suggests having outside sales reps focus on key and target accounts — the ones with the most potential for new business. Let inside sales reps handle the ongoing routine needs and purchases of the less profitable customers.

Distributors can use segmentation to identify areas in existing accounts where they are potentially losing business by benchmarking against customers with similar pricing and purchasing behavior. Sales reps can see what products aren’t being purchased and present these to the account.

“This process, called wallet share, allows distributors to increase sales by 10 to 20 percent overnight without calling on customers but rather identifying sales that are not being garnered with existing customers,” says Pericle.

To determine the potential for future sales, Kahle measures the “partnerability” of customers and their quantified purchasing capacity (QPC).

“QPC is the answer to the following question: ‘If this account purchased everything they could from me over the next 12 months, how much would that be?’” says Kahle. “Partnerability is a subjective measurement. Are customers open minded? Are they well managed? You begin to ask these questions and collect information that will help you discover which group of customers are ‘partnerable’ and where you should spend most of your sales resources or time.”