Increase Profitability – Customer Selection

The concept of selecting customers may seem strange.  Many businesses will sell to all those who want their products and services.  What is your ideal customer?  What types of customers drive you crazy?

Who you target with your marketing and promotional programs can help in your customer selection.  I have a friend at the local PBS radio station who has explained to me the demographics of their listeners and the range of their signal.  They have very high numbers with higher income people particularly during the drive time hours.  If you would prefer to target your growth plans to this demographic, this type of medium is worth considering.  It pays to understand and define your target demographic.

If you are measuring the profitability of each customer, you may find that some customers create volume but minimal profit.  Who hasn’t heard stories of companies selling to big box retailers for small margins, only to find that they aren’t making any more money?

Customer pricing is straight forward.  But also think about the less obvious areas such as customer returns, claims of damages, deductions, late or slow payments.  You may be able address these with price but these areas may also be adding considerably to your indirect costs.  I have experienced demanding purchasing agents that expected to be wined and dined regularly, who wanted tickets to events and still expected the lowest price.  I once worked with a consumer products company that found a medium sized national retailer had minimal backroom space in their locations.  This customer had higher than normal product damage because of the space constraints, and was insisting packaging was the issue.

Customers who require extensive hand holding in the collection process increase your cost of doing business.  Are they providing comparable profits?  Should you consider firing them and focusing on customers who create less administrative burden.?

The best way to improve customer selection is to measure customer volumes and profitability.  Who is buying what lines and what are they paying?  What is the impression of the customer in your customer service function, shipping and receiving area, collection staff and sales force?  Consider ranking your customers and then planning to improve the overall profitability of your company by directing your efforts toward the profitable areas.

B2B CFO® has over 200 experienced chief financial officers have deep experience in studying customer mix, product mix, selling prices and material costs.  A B2B CFO® can help you understand these areas and offer independent insight to improve your business’ profits.

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