WHY YOU NEED TO FIRE YOUR CUSTOMERS - Amazon S3

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WHY YOU NEED TO FIRE YOUR CUSTOMERS

March 13, 2015 Latest News customer, focus, profit margin Carl Allen

Yes, you read that correctly, but let me explain. If you have great customers that are easy to deal with and more importantly, profitable to you, then obviously don't fire them! Model how you won those customers and how you serve them and use that insight to create your `amazing customer manifesto.'

The issue, however, is how do you determine what constitutes an `amazing customer'. There are several ways to look at this. Do they generate referrals for you? If so, how many? We spoke previ- ously about the sales conversion cycle. Taking a `suspect' to a qualified `prospect' through to a `customer', then a `repeat customer' finally to a `raving fan'. A `raving fan' is a customer that re- peatedly buys from you; it's their mission to help you grow. Raving fans will also tell all of their friends and business associates about your product and service, so others buy it.

The primary way of determining your amazing customer is by financial data, and I'm going to show you how to do it. The seven steps to determining your amazing customers and the others you should fire. For this, we are going to look at operating profit as the measure. We are going to determine the profitability in your business, by customer. If your business has $3 million of sales revenue and then $2.7 million in total cost of sales and operating overhead, then your operating profit will be $300,000 or 10% operating profit margin. If you then have 15 customers in your business, your average profit for each one of those customers will be $25,000. However, there will be a wide range, and that's what we are going to determine next. It's best to do the analysis over a trailing 12-month period (so the last 365 days) or you can do it to your last financial year-end, or monthly, quarterly, even weekly if your sales revenue spikes up and down over the course of a 12-month period. Step 1: Determining sales per customer. Step 1a Amazing Customer, Inc.

Customer Sales ($)

1

$622,800 6

2

$566,600 7

3

$403,800 8

4

$316,800 9

5

$248,100 10

$176,400 11 $154,300 12 $127,800 13 $100,800 14 $87,600 15

Total

$67,800 $45,000 $37,200 $27,000 $18,000 $3,000,000

Your internal systems will tell you sales per customer. Whether you use an accounting program (like Sage), a CRM system (like Infusionsoft) a simple spreadsheet or just have paper files per customer with all the purchase orders and invoices. Dig out whatever system you have and list your sales revenue per customer. If you have unit sales or hours billed, then great but this is not necessary.

Step 1b Amazing Customer, Inc.

Customer

Sales, % of total

1

20.8% 6

2

18.9% 7

3

13.5% 8

4

10.6% 9

5

8.3%

10

5.9% 5.1% 4.3% 3.4% 2.9%

11 12 13 14 15 Total

2.3% 1.5% 1.2% 0.9% 0.6% 100.0%

Step 2: Gross profit per customer.

Now you need to do a little more work. If you run a service business, it's easier as you will be log- ging the time spent on each client (your sales revenue). Also, you will know who has done the work for the client and what those people cost you. If you have a products business and either manufacture, yourself or buy-in then resell, you need to look at your costing system.

Step 2a Amazing Customer, Inc.

Customer

Gross profit, %

1

29.3% 6

17.1%

11

2

26.6% 7

27.3%

12

3

18.6% 8

26.8%

13

4

14.7% 9

19.0%

14

5

32.5% 10

30.5%

15

23.5% 30.2% 21.0% 34.2% 40.3%

This will tell you how you account for the cost of the product that you are either manufacturing and reselling. If you are always buying-in at the same price, then it's very easy. However, in most situ- ations your prices will vary, based on seasonality, how much you order, where you order from and how quickly you need the inventory. I am sure you have an internal system that calculates the cost of supplying each customer. That's the data you need. You need to calculate this as an aver- age margin per customer. In the example, the average gross margin is 24.7%, and that amounts to $741,636 in gross profit as a dollar value. However, the margin ranged from 14.7% to 40.3% across the 15 customers.

Step 2b Amazing Customer, Inc.

Customer Gross profit, ($)

1

$182,480 6

2

$150,716 7

3

$75,107 8

4

$46,570 9

5

$80,633 10

$30,164 11

$15,933

$42,124 12

$13,590

$34,250 13

$7,812

$19,051 14

$9,234

$26,718 15

$7,254

Total

$741,636

Ave gross margin

24.7%

Step 3: Direct cost per customer.

If you are manufacturing products, the time spent by operatives in the factory will probably form part of your cost of sales and gross margin, so you don't include these here. However, if they are not included and form part of your general overhead, you need to allocate in this step. If you have time cards, that allocate hours worked per product, or customer, then great! You can use the data

here and have a more accurate picture. That is how you would do it for a services based busi- ness. If you don't have this level of data in your business, don't worry. Using an allocation based on sales revenues gives you a good answer. If you have dedicated staff responsible for a particu- lar client, as an account manager or sales rep, include the cost in here.

Step 3 Amazing Customer, Inc.

Customer Direct costs

1

$10,000

6

2

$30,400

7

3

$16,400

8

4

$26,700

9

5

$1,300

10

$13,400 11

$3,450

12

$3,000

13

$11,200 14

$-

15

Total

$$1,020 $4,300 $$850 $122,020

For employee costs, you need to use the total cost to your business, so include salary, employer's tax contributions, pension costs, transport, expenses, training, etc. If you have a particular ma- chine that is only used for one customer, the operating cost of the machine will be included here. Once you have done this and created a total, you need to deduct this from the total overhead cost. In our example, the total direct cost is $122,020.

Step 4: Yours and management cost.

In a medium-sized business (sales revenue between $10 million and $50 million) your manage- ment team's cost will be a good percentage of your total wage bill. As you will know, management time can be split unevenly across the customer base, including yours. If you have 15 clients yet you spend 25% of your time with just one of them, you need to allocate the time accordingly.

Step 4 Amazing Customer, Inc.

Customer Management time

1

$6,000 6

$8,200

11

2

$1,000 7

$-

12

3

$2,000 8

$800

13

$$600 $1,800

4

$8,100 9

$2,800

14

$-

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