Recent studies indicate that at least 15% of a company's customers actually cause out of pocket losses to the seller. Determining customer profitability, so you can focus on profitable customers and reduce your focus on unprofitable customers, isn't as easy to do as you might think.

Traditional approaches to customer profitability analysis apportion seller costs to a customer's overall revenue. This approach can overstate the costs of selling to smaller customers and understate costs of selling to larger customers. As a result, high-volume accounts are often judged "best" by salespeople and managers. Unfortunately, some important information is usually missing in this approach.

Adopting an approach Chuck Moyer calls Responsibility Accounting (RA) often paints a clearer picture of customer profitability. With the RA methodology direct costs such as salaries, order processing, packaging, invoicing, returns and allowances, costs of sales calls and servicing costs are assigned to individual customer revenue.

This approach provides a much clearer view of individual customer profitability versus the profitability of groups of customers with similar revenue numbers but vastly different costs associated with their revenue. It's often surprising for managers to learn that their companies are losing money by selling to some of their "best" customers.

We're convinced that RA is more accurate than standard approaches to analyzing customer profitability. Managers may find that RA 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!

Key Receivers As Customers

One of the most important things I learned as a new sales consultant was that three rules apply to all organizations today:

Rule #1 - Everyone in an organization is a salesperson.
Rule #2 - Not everyone believes Rule #1.
Rule #3 - Everyone has customers.

The most successful, customer-centric organizations we encounter work hard to create a culture that champions all customers, including the company's employees - their "key receivers." Managers in these organizations recognize that they oversee a volunteer workforce, and they realize that their success as managers depends, to a large degree, on their ability to persuade employees to work at fulfilling the company's mission.

We've noticed that these same managers faithfully follow their company's sales process when interacting with subordinates. The methodology they use in working with customers works as well when working with "key receivers."

We don't think it is an accident that companies that are satisfied with their implementation of highly complex CRM (Customer Relationship Management) systems share a common approach to managing their employees. Instead of simply announcing the arrival of new CRM software, managers solicited input from all affected business units during the project's planning phase, launched modules in stages to promote user adoption, and addressed the cultural shift issues that a major change in software often entails. In short, they approached their employees as customers of the new software system!

A willingness to accept the three rules that apply to all organizations today, and a commitment to treat everyone in the organization as a "customer," helps create a true customer-focused enterprise. In these organizations, providing excellent customer service becomes the habit of the company's "key receivers."

Welcome
Welcome to our revised eNewsletter format. Our intention is to provide readers with thought-provoking, sometime irreverant articles on sales, sales management, sales negotiations, sales talent management and business acumen.