CUSTOMER PROFITABILITY: Are You Investing in the Right Customers to Help Your Company Grow?

Credit & Financial Management Review, 2004 by Suzuki, Teri, Thornton, Grant, Butler, Jessica

Abstract

In the search to understand the true cost of doing business in today's economic environment, companies are raising a variety of new questions, including:

"One of our customers routinely places late orders. We jump through hoops to fulfill these orders, reallocating inventory and adjusting distribution routes. How is this impacting profitability and our relationships with other customers?"

"One of our major customers hits us with so many deductions for retail compliance violations and our current margin analysis doesn't include these deductions. Aren't these eating away our bottom line?"

"Some of our customers are taking markdown allowances early and stretching payments out. They have our goods and our money too! Are they worth the business?"

"We have limited trading partner dollars. How do we know that we are investing in the right partnerships which will help our company grow?"

If you are like the chief executive officers (CEO) and chief financial officer (CFO) we have talked to in the last year, these comments may sound familiar. Senior executives realize that the traditional rules of profitability are no longer as simple as they used to be. A simple calculation of gross sales less cost of sales to obtain a gross margin, often leaves out key information critical to assessing the true "cost of doing business" in today's business environment. Now more than ever, CEOs are trying to get their hands on the entire profitability picture and challenge their managers to provide a comprehensive view of a customer relationship, ensuring the company is making the best decisions possible to achieve profitable growth.

In this article, we answer the questions often posed to us by executives and discuss the obstacles they face when trying to get a true picture of customer profitability. By providing practical front-line experience and case studies, we will attempt to shed light on the strategies critical to success in obtaining a comprehensive view of customer profitability.

If this is So Important in Making Strategic Decisions, Why Isn't Everyone Doing It?

If CEOs know what they want, why aren't they getting it? It seems so simple, right? Go collect all relevant information on a particular customer, crunch the numbers and summarize it. Use this customer summary to help make the "right" decisions. It appears straightforward, so why is it so difficult?

In our work with wholesalers, manufacturers and distributors we have seen three major obstacles in building a comprehensive view of customer profitability:

1. No one "owns " the job (aka the CPO is MIA)

2. You don't speak the same language

3. It 's difficult to get your hands on the right information

Challenge Number One: No One "Owns" the Job (aka the CPO is MIA)

The problem: Have you ever met the chief profitability officer (CPO) of your company? If the CEO wants a point-person for customer profitability in your organization whom does she go to? The CFO? The chief operating officer (COO)? The vice president of sales? Or the CPO? Is customer profitability analysis written into anyone's job description? If not, then you may find yourself in a situation similar to many of our clients. They lack a natural point-person for this question. And without responsibility, there is little accountability.

Things to consider: In order to begin developing true customer profitability information, someone must take the lead. But who should this person be? There are many "right" answers to this challenge. We have seen customer profitability initiatives successfully led by the CFO, the chief administrative officer, the senior vice president of customer relations or the COO. These leaders often are selected as the point-person for special projects in their organization and have a proven track record of seeing projects through to completion. We believe successful customer profitability leaders also share four common characteristics:

* They have the authority and respect of senior management, especially across organizational boundaries.

* They have a solid understanding of the order to cash cycle.

* They are able to garner the resources to get the job done.

* They are passionate about getting the right answer, even if it requires a significant investment of time and resources.

The first step for most companies is to designate a CPO in the organization by identifying a champion for this initiative. In our experience, identifying the person with the right characteristics is more important to a successful customer profitability initiative, than assigning or selecting a person by title.

Challenge Number Two: You Don't Speak the Same Language

The problem: Have you tried to have a discussion about customer profitability in your company? If you are like many of our clients, the discussion can be quite frustrating and may sound something like this: The vice president of sales is pushing to increase business with a key customer. The CFO is pointing to a customer gross margin report, indicating this customer has a boarder-line gross margin. The head of distribution brings up the history of this customer to change orders at the last minute, while the operations manager highlights the various compliance requirements imposed by this customer and the cost to comply. The credit manager raises the cost of non-compliance and pushes for a more comprehensive look at total customer "dilution." The vice president of sales stresses, "We need to grow our business. Isn't this just the cost of doing business?"