Archive for September, 2010

Your top five to ten customers likely deliver the majority of your revenue, and in some cases, the majority of your profitability as well. However, when all of the costs of doing business with these customers are accounted for, you may discover that some of these customers are a lot less profitable than you think. That’s what a capital equipment company discovered when it added up all of the costs associated with supporting one of its’ largest customers. In the following example, I’ll refer to the large customer as Customer A.

In most years, Customer A accounts for between 5% and 10% of the capital equipment company’s overall revenue. Most everyone in the company just assumed that Customer A was very profitable, because the revenue from Customer A was typically greater than from other customers.

When the company embarked on a project to identify and add up all of the costs related to doing business with each of its’ ten largest customers, it was surprised to learn that the business from Customer A was actually less profitable, on a total dollar and a percentage of revenue basis, than the business from all but two of the company’s other top ten customers.

It turned out that the company had devoted hundreds of employees and tens of millions of dollars of equipment to supporting Customer A. In addition, Customer A demanded that the company adopt unique manufacturing procedures, specifications and techniques that together took a tremendous amount of work to manage, and benefited no other customers. The company also provided large, no cost spare parts inventories, multi-year pricing commitments with guaranteed year-to-year price reductions, and very lenient payment terms to Customer A. There were numerous other previously-unaccounted-for costs, but by now you get the picture: Customer A cost the company a fortune to do business with.

Of course, the potential exposure and prestige of having your products and services adopted by an industry leader can certainly be worth the investment, as it can often influence sales with your other customers and prospects. My point however is this: you should know as much as you can about the true costs and benefits of working with each of your largest customers before you negotiate the next contract with them. Add up all of the costs of serving these customers, and don’t be afraid to point them out in your negotiations. You’ll end up with a much better, more profitable deal in the end.