It's obvious that without customers, your company wouldn't be in business. But not all customers are alike. Some account for a big percentage of your profit, while others' contributions may be negligible.
It's entirely possible that about 10 percent of your customer base is costing you money. While they contribute to the top line, they sabotage the bottom line in any number of ways. For example, they may demand that you turn on a dime and need lots of hand-holding. You may even find that your biggest revenue-generating customer is a liability if you've slashed your profit margin until it bleeds and committed top management, large chunks of time, and extra resources to servicing the customer.
A useful exercise is to segment and study your customer base -- the top 10 percent, the bottom 10 percent and another 10 percent with high potential. Here's a basic four-step plan:
It can be hard to get a handle on customer profitability. The surest way is to do activity-based costing (ABC) that shows how much money is spent on each activity, including sales, order processing, receiving, set-up, shipping, billing, etc.
Then, determine how much of each activity is allocated to each customer. This type of analysis reveals where customer costs and revenues are out of whack, and provides the basis for making changes toward greater profitability.
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