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Manage Your PortfolioIf you play the stock market, I assume you check your holdings from time to time to see how they are performing. We all know that some perform better than others. The trick is to keep the good ones and get rid of the dogs before they cause you too much pain. Have you ever considered all of your customers as a portfolio of investments into which you have been pouring your organization's resources in hopes of an optimal return? If you have, you know that some accounts are quite profitable and others are losers, because they cost more to serve than they contribute in margin dollars. I talked to a distributor recently who actually took the time to rank all of his accounts by profit contribution. He confessed that because of the problems of allocating fixed, semi-variable, and even variable costs, he could never perfectly rank accounts from best to worst. But the lack of completeness did not keep him from going through the exercise. This is what he found:
This distributor's crude analysis suggested that the top 35% of the accounts generated 155% of the profits to offset the losses of 55% caused by the other 65% of his accounts. He also concluded that the top 20% of his customers are the most profitable and should be protected and secured as the company's most precious assets. The 60% in the middle of the ranking report are not of immediate importance to him or his company. Since most are about break-even, have a similar overhead allocation, and help achieve the sales goals (discounts) established by his manufacturers, he doesn't tinker with them too much. It is the bottom 20% of his accounts that really get his attention. He figures that there is only one way to be at the bottom of such a report—little margin activity and lots of transactional expense, which always causes a loss. Starting from the last-place accounts, each is individually analyzed by each applicable profit center (sales, service, environmental and construction, in his case) and most often acted upon in some corrective manner. The people or departments responsible for these accounts must explain what happened, and then a corporate decision is made to either shape them up or ship them off to the competition. The benefits gained by such an analysis and subsequent actions are substantial to the overall profitability of the company. First, by identifying the top 20%, his company puts more effort into securing the loyalty of their best customers. Second, firing some of his worst customers allows him to redeploy some of his resources into more profitable business. Third, he has begun to develop a system of preventive measures to keep new or old losers from sneaking back into his customer portfolio. The bottom line of this exercise is that it redefined his firm's corporate strategy to be focused on qualitative growth of profitable customers instead of quantitative growth of gross sales, which added too many unprofitable customers into his portfolio.
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