Have you ever kept delivering to a marginally profitable account? Here’s some big news — when you sell product, you are supposed to make a profit!
Somewhere in the petroleum industry, gallons/volume became the driving factor. Marketers took pride in the number of annual gallons their company sold. This “bigger is better” philosophy, however, is often detrimental to bottom-line profits.
Take a hard look at the cents-per-gallon profit you make on each individual customer. Most GL systems have the capability to run customer margin reports by cents-per-gallon gross profit, from the highest profit to the least profit on a cents-per-gallon basis. Run this report, then be prepared for shock.
If you are like most marketers, you’ll find you are losing money on some accounts, even before factoring in delivery costs. How? Through the cost of receivables holding time.
Figure for every 10 days a customer takes to pay you beyond your supplier terms, your cost is 0.25 cents per gallon. A customer who pays in 30 days, for example, when your fuel supplier is on net 10 costs you 0.5 cents per gallon. If you are in an agricultural area where payment timing is even slower, the cost is even greater!
If you think that your finance charges are compensating you for the holding time, take a careful look at your finance charge terms. The most common commencement date for finance charges is after 30 days delinquency. The smart customer that pays at 29 days each month avoids the finance charge and costs you a half a penny to boot!
If your system does not calculate freight costs, you will need to apply an estimated freight rate to the customer’s profit margin. If you need a quick and easy “guesstimate,” use common carrier rates.
By taking each customer’s margin, subtracting out the time cost of money for carrying receivables, and subtracting the cost of delivery, you can see how much (or how little!) you are making on each customer. Never lose sight of your objective in this business – to make a profit!
If you go through this exercise and find you have unprofitable accounts, it’s time for hard decisions. First, evaluate the aggravation level with that account. Let’s face it, there are some customers that make you and your staff crazy. Life is too short to be dealing with these people, particularly when you’re losing money on them!
If you are constantly having to bend over backwards and spend inordinate amounts of man-hours on a particular customer, you deserve to get compensated for the extra effort. As you review your customers, however, you’ll likely see that some of the customers who send your staff jumping through hoops at the slightest whim are also your thinnest margin accounts.
None of us like to lose customers or volume, so your first strategy is to try to make the account profitable. Often you can raise the margin without losing the account if the relationship is strong. Is there any service you could offer to the customer that would allow the customer to pay a premium price? Many marketers have found total fluid management to be the answer to achieving high margins.
By monitoring customers’ inventory levels, making sure they don’t run out of product without ever having to place an order, and keeping them totally up to date in new products and technology, marketers can earn high profit margins while shutting out the competition.
If you cannot raise a losing customer’s margin, let the customer go! Forget the volume you are losing! Think of it as giving your competitor an account where you know he will lose money. There should be a sense of satisfaction in getting rid of this customer, not a sense of loss!
Using your margin reports and a little savvy about the demands each customer places on your business, rank your customers into three categories. It’s just as important to know the good customers!
“A” customers are the ones where you make money, get paid on time and they never bother you. You definitely want to keep and nurture these customers. Everyone on your staff should know who these people are and take extra good care of them.
“C” customers are the opposite of A’s. The margins are thin while the aggravation level is high. You either upgrade these accounts or get rid of them. Everyone else who isn’t an A or C is a B. Work on making them A’s.
Marketers who use gross margin reports to monitor customer pricing see immediate improvement in their bottom-line. Take the time this month to run, review and act on yours. You’ll be glad you did!