Monthly or quarterly, analyze and determine which customers need your attention before making another trip to their office to accept losing orders. Calculate the total net sales and net profit for every customer for the period you are studying. After you have lined them up by net sales, sort the list to see who is generating the most profit for you which may not be the highest sales client on the list. After this, sort the list by net profit % (net profit/net sales). At this point, you need to consider the following ideas to try on your list depending upon the depth of sales, number of products or services and just how differently pricing varies within your industry.
Reasons to Analyze Net Profit Percentages:
- Identify the lowest net profit %s on your listing; know where you are bleeding.
- Isolate the bottom 1/3 or 1/4 of your list sorted by NP %s regardless of the sales volume at this point. This includes small and large customers (defining size as a measurement of net sales).
- Look at this list of the bottom 1/3 (you choose the slice size) and look for the largest sales dollar customers. These will be the ones you want to thoroughly analyze because improvements among that defined group will have the largest impact on your overall weighted net profit percentage, thus boosting profits more than the smaller accounts. Fix the largest sales dollar accounts first to cause the biggest impact.
- Run the product report for each of these low net profit percentage, high dollar sales customers. Some may have the majority of their sales at a lower net profit percentage (hard accounts to turn around), some may have a few products or services that are tainting their overall average (requires strategy and consideration of alternatives for the customer), or maybe a customer in this group has only a couple of items but those few items lost the most money (drop the bad unprofitable items, offer to redesign or strip out costs to retain the volume or hold prices elsewhere except for these select items). This is what you need to know in order to determine whether the customer is retrievable or not. The fewer the problem products or services, the larger the chance you have to improve this poor performer. It is easier to change or affect a few than the majority of the basket.
- Determine your approach with these customers. Decide whether to raise prices, cut costs, change the mix to one more favorable to your firm or when all else fails, announce a major price increase and see what favorable outcome occurs.
- Regardless of what happens it will be to your favor since a poor performing customer will either leave or will then begin to pay more, and subsequently increase your bottom line. You will win on either outcome.
- You gain nothing when you continue to operate clueless or see the problem accounts and proceed to do nothing. Act!