And Now a Word on Profitability

And Now a Word on Profitability

Phoenix — Not all customers are created equal. The trick of advanced analytics, as revealed during a presentation at the ProDealer Industry Summit, is to identify which customers are profitable, and which are a drain on the business.

It’s easier said than done. But knowledge is power when attempting to boost profitability.

Jason Niemi and Jason Bolstad, co-founders of Building Results CRM, a DMSi product, pointed to statistics that showed 60% of your customers make up 160% of your profits. Simply put, the key to customer relationship management involves identifying those profitable customers.

The first step to successful analytics is understanding the cost of services provided, including allocations that could be contentious within a company. “It doesn’t have to perfect, but just get it close,” Bolstad said.

A customer net profitability report can show which customers are adding to the bottom line, and which are detracting from it. According to Niemi and Bolstad, a systematic approach to improving profitability involves organizing customers into four categories:

Core — high gross-margin, loyal customers
Opportunistic — similar to core, but less sales volume
Marginal — not high volume, not costly to serve, but candidates to slip into the unprofitable category
Drain — high-cost of service and unprofitable

Identifying the type of customer is only the beginning. The key is to move the customers into the profitable categories, and out of the drain category — even if it means cutting them loose. And the big question remains how do you handle customers in the drain category.

He offered a couple of suggestions involving customer communications. One is to be more clear with return policies. Another is to be honest with the customer about the details of its status as a drain. “I would recommend: don’t be afraid to be very honest,” Niemi said.

With customers identified in segments, a company can concentrate on converting the opportunistic category to a core category.

And there’s also advice for how to treat those customers who are already in the profitable core category.

“Study them,” Niemi said. “What are the behaviors between you and these customers that allow you to make money. And also study them as a company, what makes them a great partner?”

This article originally appeared in Hardware + Building Supply Dealer.