Fire Your Best Customers?

What would you do if the sales consultant you hired to help increase your company’s profitability
told you to fire some of your best customers?  You would listen, if your sales consultant was our
customer profitability expert, Jim Lambert.

Jim reminds me that recent studies indicate that at least 15% of a company’s customers actually cause
out-of-pocket losses to the seller. It is no small wonder that more executives don’t focus on the
profitability of their customers. 

For some companies, like distribution enterprises where margins can be razor-thin, regularly
assessing customer profitability is a metric that usually spells the difference between sustained
profits and bankruptcy court. 

Unfortunately, traditional approaches to assessing customer profitability often do more to confuse
and generate arguments than to provide a meaningful picture of a customer’s profitability. 

A traditional approach like activity-based-costing (ABC), for example, assigns a percentage of all
overhead costs to every transaction.  For the sales organization, this creates at least three problems:
1) the sales organization is charged with costs they have no control over; 2) unnecessary complexity
actually hinders the attempt to understand a customer’s profitability; 3) disagreements over the
appropriate allocation of costs diverts management’s attention from meaningful analysis.

In many cases, the profitability of high revenue customers is overstated and the profitability of lower
revenue customers is understated.  This leads senior managers, sales managers and salespeople to
erroneously conclude that their higher revenue customers are their “best” customers.

Accurately determining customer profitability requires a more sound methodology and a disciplined
approach.  Adopting an approach Jim Lambert calls Responsibility Accounting (RA), where
sales people and managers are accountable only for costs they control that are associated with
specific account revenue streams, can paint a clearer picture of customer profitability.

With the R.A. methodology, direct costs such as salaries, order processing, packaging, invoicing,
returns and allowances, costs of sales calls, servicing costs and order-to-cash-cycle are assigned to
individual customer revenue.  Because some customers may have excessive costs in some of these
categories, it is often surprising for managers to learn that their companies are losing money by selling
to some of their “best” customers.

We are convinced that Responsibility Accounting is a more accurate methodology for determining
true customer profitability than the more standard, traditional approaches like activity-based-costing.
Managers may find that R.A. helps to identify those among their “best” customers who are the least
profitable, and helps them avoid focusing on expanding business with the wrong customers.

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Copyright © 2006 Selling Up™.  All Rights Reserved.

About the author: Steve Chriest is the founder of Selling Up™ (www.selling-up.com), a sales consulting
firm specializing in revenue and sales improvement for organizations of all types and sizes in a variety of
industries. He is also the author of Selling The E-Suite, The Proven System For Reaching and Selling
Senior Executives and Profits and Cash – The Game of Business.   You can reach Steve at
schriest@selling-up.com.