United Pipe & Supply learned that a focus on treating your "best" customers right, sometimes hides the fact they're losing you money, and that it's the secondary customers that keep you in the black. The trick is finding out which is which.
It was late fall of 2002 in Portland, Ore., and Dave Ramsey, owner of United Pipe & Supply Co., a $174 million supplier of plumbing and irrigation systems throughout the Pacific Northwest, couldnt believe his eyes. "Youve got to be kidding me," he said, staring dumbly at cio Mike Greens computer screen. "Thats our worst customer?"
Its not unusual for brand-new owners of business-intelligence software to experience an epiphany upon installing it. When the numbers start feeding into the system, companies learn things about their businesses they never dreamed.
We spent how much on travel? Our inventory is how many months behind? Can we switch to a cheaper brand of coffee? But when Ramsey and Green first saw United Pipes numbers on customer profitability, they shared the shocking revelation that the companys biggest and most prized customer was also its least profitable. In fact, their so-called best customer was costing them $50,000 a year.
"Dave turned white and got real quiet after that," recalls Green.
Thus began the process of analyzing how, exactly, such a critical customer could have become so unprofitable over time. And in an effort to maximize profitability across the company, United Pipe launched a companywide examination of each of its customers. The problems the company uncovered ranged from unpredictable pickup and delivery schedules, to revenue-motivated salespeople who overserviced their biggest clients. After United Pipe addressed some of the issues, profits before taxes increased from 1.5 percent in 2003, to 4.7 percent in 2005.
"Salespeople are hunter-gatherers, out there to bag the next customer. But volume doesnt necessarily yield bottom line," Green says. The difficult part is convincing them not to say yes, automatically, to every single customer demand. Green believes many salespeople are willing to agree to terms that make the customer unprofitable from the get-go, and any increase in service just makes things worse.
Since the revelations, United Pipe salespeople have begun to understand that there are times when, if a potential customer says it can get better terms from a competitor, it might make more business sense to wish them well. "Sometimes, with information in hand, we have more of a spine," Green says.Read the full story on CIOInsight.com: Pipemaker Learns a Hard Lesson in Customer Profitability