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Profit Improvement Report associated with customers are fully escapable when Exhibit 1 customers are eliminated. Another 20 percent are The Impact of Eliminating Customers partially escapable. The remaining 60 percent are For the Typical AED Member entirely inescapable. Current Customer After Percent This issue is highlighted in Exhibit 1. The Income Statement--$ Results Elimination Elimination Change Net Sales $35,000,000 3,500,000 $31,500,000 -10.0 Current Results column represents the perforCost of Goods Sold 27,475,000 3,123,750 $24,351,250 -11.4 mance of the typical AED member. In the Gross Margin 7,525,000 376,250 $7,148,750 -5.0 Expenses Customer Elimination column the firm has Fully Escapable Expenses 1,379,000 206,850 $1,172,150 -15.0 chosen to rid itself of a set of customers who Partially Escapable Expenses 1,379,000 103,425 $1,275,575 -7.5 represent 10 percent of its sales volume. Since Inescapable Expenses 4,137,000 0 $4,137,000 0.0 Total Expenses 6,895,000 $6,584,725 -4.5 unprofitable customers are also typically lowProfit Before Taxes $630,000 $564,025 -10.5 gross-margin ones, the firm has only sacrificed 5 percent of its margin dollars. Income Statement--% 100.0 100.0 In addition, unprofitable customers are almost Net Sales Cost of Goods Sold 78.5 77.3 always high-expense customers, so it is assumed Gross Margin 21.5 22.7 Expenses that when 10 percent of sales go away a full 15 Fully Escapable Expenses 3.9 3.7 percent of the fully escapable expenses, such Partially Escapable Expenses 3.9 4.0 Inescapable Expenses 11.8 13.1 as sales commissions, can be eliminated. The Total Expenses 19.7 20.9 partially escapable expenses are another matter Profit Before Taxes 1.8 1.8 entirely. The reduction in delivery costs, order picking, sales force travel and the like are modest in A Meaningful Customer Plan. The real challenge in relationship to the sales eliminated. In the example, these customer profitability is that with a third of the customers costs decline by only 7.5 percent, about half the decline for unprofitable and yet only 2 percent worthy of firing themthe fully escapable expenses. selves, the firm is left with a substantial challenge: To get As can be seen in the After Elimination column, when the remaining group to profitability will require some price customers representing 10 percent of sales are eliminated, increases coupled with a large dose of service modification. both dollar profit and profit as a percent of revenue This group almost always places too many small orders too decline. The company is doing less work and may have frequently. This practice not only increases the costs of servicing fewer accounts, but it also has less profit. Large customer an account, it increases the customer���s own costs as well. cuts simply don���t drive higher profits. Over time it is possible to explain to customers how placing fewer but well-planned orders and deliveries improves Customer Strategies profitability for everybody in the channel. It is a slow process Customer profitability analysis can be helpful if used but one that inevitably leads to much higher profit. It is also properly. Two specific actions prove to be most beneficial a process that needs to be lead by the sales force; the group in working with customers: (1.) focusing on the least on the front line in dealing with customers. profitable 2 percent of customers and (2.) developing a meaningful customer profitability plan. Moving Forward The Bottom 2 Percent. Most analyses suggest that Distributors have a wonderful array of new analytical about 2 percent of customers can never be made profittechniques at their disposal, of which customer profitability able. These are the ones that do not generate enough analysis is only one. Unfortunately, the analytical techgross margin to even cover the direct costs of servicing niques available often outpace the capability to use those them. They also don���t really care if their suppliers make a techniques fully. Obtaining maximum impact requires profit or not. understanding that they must be used as aids to manage The easiest approach is to simply let such customers fire ment judgement, not replacements. n themselves. This can best be accomplished by systematically increasing prices until they cover the direct costs of servicing Dr. Albert D. Bates is founder and president the account. Systematic can be interpreted as slow but steady of Profit Planning Group. His latest book, Triple or fast but steady. In either case, driving more margin is Your Profit!, is available at: www.tripleyourprofitalmost the only way to overcome large-loss customers. book.com, as well as Amazon and Barnes & Noble. Eventually, problem accounts either become profitable ��2012 Profit Planning Group. AED has unlimited or chose to become problems for some other supplier. duplication rights for this manuscript. Further, Since these customers are dramatically unprofitable, their self-elimination actually does increase profit. Unfortunately, members may duplicate this report for their internal use in any way desired. Duplication by any other organization in any manner is that is not true for the remaining customers who are not strictly prohibited. covering their full costs. January 2013 | Construction Equipment Distribution | www.cedmag.com | 63 62_Bates_Profit_Feature_EB.indd 63 12/21/12 1:29 PM