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Not all customers will add equally to a company’s bottom line. Since the firm’s employees only have a limited time to satisfy their customers, tell them who to pay particularly keen attention to, because those in that preferred group pay the majority of the company’s bills.
Categorize your customers according to that which is more relevant to your firm. Here are some examples. Study them, review them against your firm’s situation and get started. It is not important if you do not have the exact numbers calculated in the beginning. It is important that you begin to focus your attention on those which have the greatest potential to favorably impact your company’s bottom line.
Various criteria from which to categorize your customers A,B and C:
- Sales dollars is one method where gross profit percentages vary little from one customer to the next. The key to this type of business is moving volume.
- Gross profit dollars is a measure that is very important where performance can vary tremendously. In some industries more sales from certain customers is detrimental if costs are not properly assigned to the cost activity and gross profit margins are not known.
- Time spent on customers or projects will kill profitability because opportunity costs are missed. For example, you spend a lot of time on a customer that generates 35%, a good margin, except for the fact that given the time spent with the person by your sales reps (SG&A expense, not included in gross profit dollars), you could have solicited three times more business at 25%, yielding more gross profit dollars.
- Ease of implementation is a very important criteria. If the jobs you accept have very high gross profit margins, but only a handful of employees in your organization can do them, you really cannot target this type of work without a lot of company upgrading. Your question should also be, “Can we handily do this work?”
