Pricing

Customer Profitability Analysis 101

By Ben Blaney
November 27, 2012

Speaking with a prospective customer recently, I was interested to hear that they didn’t actively manage their customers according to a simple four-box matrix of revenue and profit, such as the one shown below.

Customer Analysis 101

There are a couple of ways to think through the placement of the horizontal and vertical dividers. You could take the organizational average – either for the business as a whole, or the dataset under analysis. I can see the logic in that. You could make an arbitrary decision on where those lines could be – perhaps a future strategic goal for the organization, or what feels like the right limit. One thing I’d advise against is making the delineations based on the median.

This is a simple, but potentially effective method of analyzing, and subsequently managing different customers according to how well they perform.

 

 

The basic rule of thumb is:

  • “A” Customers – Maintain
  • “B” Customers – Grow
  • “C” Customers – Upgrade the Mix
  • “D” Customers – Improve or Exit

How should a commercial leader go about doing these things?  Here are a few practical steps.

A Customers – Maintain

These customers are the most important. Customer intimacy is incredibly important; the organization should get early-warning of any discontent, to be able to take steps to address the situation. These customers can also provide important feedback into future product strategy, so their thoughts, wishes and desires should be actively considered. Lastly, they should have the best of the best – preferential terms and conditions that the other types of customers don’t get.

B Customers – Grow

These customers are highly profitable, so the key here is to enable and benefit from their growth. Can the organization help them penetrate additional markets? What is the total opportunity in the markets in which they are currently operating? Are there ways we can work with the customer to displace a competitor and increase our share of wallet?

C Customers – Upgrade the Mix

These customers are significant in terms of revenue, but are buying the low margin items. That could simply be a function of their size, and the concomitant discounting that may be occurring. There should be a correlation analysis conducted, so see whether the root cause is the customer buying the items that happen to be low margin, or if these customers’ buying behaviors make certain products low margin.

D Customers – Improve or Exit

We have to be brutally honest with these accounts. They are small in revenue, but they are hurting overall margins. The good news is that we can take bold actions, changing discount amounts, rebate schedules, freight recovery targets and payment terms – with little risk. In fact, it can be regarded as a win-win situation; if they change, the organization’s financials improve, and if they exit, the organization’s financials improve.

Your organization should have a system in place to continuously measure the specific, targeted activities taking place, measuring the changes on a per-customer basis, and measuring the macro benefit to the organization. You should repeat this analysis at regular intervals, because there will always be a new set of opportunities to go after.

– Ben Blaney

    Ben Blaney

    Ben has 10 years experience in the pricing space, managing people, processes, and projects, delivering operating income improvements in excess of $50MM. He leads Commercial Excellence at a division of Colfax Corporation. Prior to that, Ben led pricing for a division of General Electric, worked at Vendavo, and ITT Corporation. He is a Certified Pricing Professional, a Six Sigma Black Belt, and holds both major project management certifications (PMP and PRINCE2).