When should you modify a customer or client relationship?

I was in a suburb of Detroit, presenting to a sales force.  The subject was “Modeling the Profitability of Relationships.”  The presentation went well until I relayed to a Sales Manager that the type of customer she was targeting was unprofitable and I would never sign them.  It turns out she was not the only Sales Manager with the belief that “every customer is a good customer.”

This situation is not uncommon and usually happens when business managers focus on revenues, and not profitability; or when your sales force is compensated based on activity and not profitability.

Characteristics of an unprofitable relationship may include –

-Customer/ Client requires preferential pricing/concessions, i.e. discounts.  Organizations negotiate special pricing or fixed rate pricing with a vendor in exchange for exclusivity;

-Customer/Client requires high touch, i.e. a dedicated customer service in exchange for exclusivity;

-Customer/ Client requires the vendor to advance cash as part of the product or service to be purchased; and/or,

-Customer/Client is a slow payer of outstanding invoices.  It is possible to have a very profitable relationship that is financially disruptive to cash flow.

An approach that has worked for me in the past, to identify non-profitable relationships includes the following steps –

Understand Your Business

-Asses your cost structure – Are processes within your organization as efficient as possible?  Are inputs priced competitively?  Inefficiencies have a cost, i.e. a non-value added cost.  Customers/clients will not pay for inefficient processes that increase the cost of your product or service.  Alternatively, you will be forced to assume the cost through lower profit margins.

-Assess your target return – What is your profit requirement?  For every $1 of revenue, do you expect to earn $0.50, $0.25, or $0.05?  You should calculate an acceptable range – “My target is between $0.35/dollar and $0.15/dollar of revenue.   If I am earning any less, it is not worth my time.”

-Assess the price for similar products in the market, from competitors.  Is your price above or below the average of competitors in the market?  Do not look to be the lowest price or the highest price.  Neither place is sustainable.

After this stage, you should have a good understanding of your economics.  If you found that [costs + your target profit] would require a price point higher than your competitors, it may be an indication that either profit aspirations are too high or your cost structure is too high.

Once you fully understand the business economics, analyze your customer/client.  It is very important to start your analysis only after you have fully understood your business economics.

Understand Your Customers or Clients – Prepare a spread sheet with client information.  For every customer/client, compare the expectations you had when the relationship was established, i.e. revenue, profit and profit margin; as well as your original target pricing.  Now calculate revenue earned, profit earned and the profit margin for each of your customers/clients.  What is your current pricing?  Review this data over a set period, i.e. three years.  One year is too short a period.

Based on the data pulled, group the customers/clients into three categories – the relationships that exceeded expectations with superior returns; the relationships that met expectations; and the relationships that performed below expectations with dismal returns.  Understand the reasons why certain customers/clients exceeded expectations.  Can relationships that met or fell below expectations be modified, to closely resemble the relationship with the highest returns?  Basic adjustments include –

-Customer/ Client requires preferential pricing/concessions – remove all discounts;

-Customer/Client requires high touch – additional usage of a help desk or service center, above an established level, should be priced accordingly;

-Customer/ Client requires the vendor to advance cash – establish an arrangement where costs are paid upfront; and for,

-Customers/Clients that are slow payers – establish a Collections Process, which rewards timely payment and penalizes late payers.

These simple modifications can make an unprofitable relationship profitable.  However, you must be prepared that your customer/client may not wish to make these changes, and decide to seek an alternative service supplier.

Obtaining a customer that becomes unprofitable is a common situation.  It only becomes an error of management if you do not perform this analysis periodically, or ignore the results.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

The Supplier Marketing Program

There are multiple ways companies market themselves.  Each form is associated with a certain level of investment and return, within a certain timeframe.  One of the most effective approaches is “quid pro quo” marketing, i.e. marketing your products or services to your suppliers/vendors.  This approach can work as a business-to-business strategy, or a business-to-consumer strategy, or both.

As a business, you pay for multiple services from your chosen vendors, i.e. software, hardware, banking, accounting, stationary, mail delivery, office cleaning…  Does your business offer any products or services that may be purchased by these vendors or the employees of these vendors?  I worked with a company that implemented this type of Supplier Marketing Program.  The program was highly successful and easily adaptable to any business.

So how do you get started?  The implementation of any Marketing program has two main pieces, both of which are required to be successful, i.e. analytical review and marketing execution.  In situations where your Marketing department does not have the knowledge and experience to perform the financial analysis that justifies the marketing investment, that responsibility should fall on the office of the CFO.

Prior to undertaking this strategy, a Return on Marketing Investment (ROMI) should be calculated.  The formula is as follows – (Gross Profit-Marketing Investment)/Marketing Investment.

Analytical Review – Estimating Gross Profit

Identify the Opportunity – Develop a table of all company relationships. Include the supplier name; contract type; purpose; pricing; term; termination requirement.  Customers should be rank ordered, i.e. highest likelihood to use the product or service you offer.  Your focus should be on the best opportunity based on your relationship type; the location of the supplier and the employee count.

Quantify the Potential – Following is the standard opportunity waterfall, which changes based on factors specific to your business –

Category Factor Opportunity 1 Opportunity 2 Opportunity 3
Total Employees (Leads) 100% 100,000 250,000 500,000
Employees that are Consumers of Product/Service 50% 50,000 125,000 250,000
Current Shoppers 25% 12,500 31,250 62,500
Capture Rate 5% 625 1,563 3,125
  • Total Employees (Leads) – total number of the employees, of your suppliers, as a group.
  • Employee Consumers – employees that would use the product or service you offer.
  • Current Shoppers – consumers that are in the market today for your product or service.
  • Capture Rate – consumers that are willing to purchase from you today.

An additional category that can be added is frequency of purchase based on your business model, i.e. tax services are needed annually, mobile phone every two years, home purchase every seven years.

Marketing Execution – Estimating Marketing Investment

The marketing process has three distinct steps –

Relationship Development – Contact the gatekeeper of the Supplier account.  Present product or service benefits.  Focus on value to the company and employee retention.

Endorsement – Develop marketing plan in conjunction with the gatekeeper.  Determine how you will reach out to the employee base and the way you will reach them.  Leave behind the appropriate marketing materials.

Account Management – Execute the marketing plan.  Activities may include desk drops, attending sales meetings/events, lunch-in-learns, etc.  Maintain ongoing contact with the employee base.  Add value by offering personal touch services.  Market directly to consumers whenever possible.

At this stage you have all of the factors needed to create a ROMI.  Use this information going forward and review the actual results to plan results, to understand if this program is a success and should be continued.

Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.

Tips to Mitigate Technology Implementation Challenges

Companies continually look for ways to reduce costs, facilitate sales, and increase customer satisfaction.  While there are a multitude of specific approaches that could be utilized to address each issue, all three of these objectives could be achieved at the same time through automation.  Production systems serve to increase sales efficiency and introduce cross-sell opportunities; while the implementation of back office systems serve to drive support efficiencies and remove non-value added costs.  Efficiencies that improve the sales process and/or the customer service process will result in increased customer satisfaction.

But, prior to searching for the best enterprise system solution for your business needs, establish your preliminary budget.  Consider licensing fees, development costs (external and internal), as well as the conversion costs.  Compute your expected Return on Investments (ROI), which is the ratio of income generated less dollars invested, over dollars invested in a process or product financed, to stimulate the growth of the company.  This statistic should be used to ensure that your financial resources are being allocated to growth opportunities with the highest returns.  As you get closer to selecting the new technology, these numbers should be revised.

Just keep in mind, any change in your business model will cause a certain level of disruption, regardless of the size of the system to be implemented.  If not executed correctly, the new system may cost you more than you expected, both today and in the future.  Proper planning is critical.  In my experience, the top issues which raise the cost of the development are consistent across different platforms, and not specific to the size of the company.  These are common issues associated with all technology implementations.

Issue #1 – Customization – When an off the shelf enterprise system is purchased or leased, a certain amount of customization will be required.  This customization serves to ensure a clear identification of features for the users, within the application, in the terms common to the business.  Another area that requires customization is the development of reports specific to managing the business or responding to client needs.  But all customization requires development time, that quickly raises the price of the new technology.  Be sure that the requested customizations are required.  Differentiate “nice to have” from “need to have.”  Negotiate and budget for this start-up expense.

Issue #2 – Integration – It is not uncommon for a business to be composed of a few systems with no integration.  This situation occurs when a business is growing and different departments purchase technology for their own areas, not considering the greater business.  This situation also is common for larger companies that recently experienced a merger.  It becomes obvious quickly, that different departments of the new business cannot communicate clearly with each other, as they are not all on the same platform.  Ensure that any new system is integrated within the company, satisfying the needs of a few departments.  At the very least, there should be integration between your productions system and financial system.  Integration requires development time and quickly raises the price of the new technology.

Issue #3 – Data Quality – When introducing new systems or upgrades, information maintained in either a legacy system or a homegrown database may be incomplete and inconsistent.  Information clean-up is time consuming and has an internal cost.  But correcting deficiencies today is a worthwhile project, vs. perpetuating issues in your new technology application.

Following are “best practices” to avoid these issues or at least reduce the negative impacts associated with implementing and managing new technology within your business –

Understand your Technology Needs – Assess the current needs of your customers (internal or external); while also considering their future needs.  This step may include surveys and focus groups with the users.  Flowchart the process today and identify what happens when things occur without issue.  Analyze the flow.  Are processes as efficient as they could be?  Now consider the experience when breakage(s) occur.  At what point in the flow does it happen?  How can this situation be avoided?

During this process, continue to consider user acceptance. If your system is not intuitive, external users may not wish to use it; and internal users may not transition to the new platform quickly, making conversion a long and drawn out process.

The output of this analysis should be reviewed with key stakeholders to gather their thoughts and views.  The result of this task will be a clear understanding of the business needs.  Document this information.

Next, issue a Request for Proposal (RFP) to service providers.  There are very few processes where there is not more than one supplier.  Send the RFP to at least three providers.

Develop a relationship that compliments your business – When considering a technology solution; the vendor relationship is as important as the technology being purchased/leased.  Prior to entering into any relationship, keep in mind, that there are common risks inherent with all vendors –

  • Employee quality – vendor employees requiring special knowledge, licensing, certification;
  • Privacy policy – sharing information regarding your processes and procedures, as well as customer information;
  • Business continuity – impact of a disruption in your vendor’s business on you; and,
  • Service quality – impact on your internal and external customers.

Establishing your requirements and how you will work with the vendor, prior to entering into a relationship, would be time well spent.

If the technology fits your needs; if the vendor will be a good partner for your business; and if the final budget and ROI are acceptable – it is time to draft the contract and statement of work.

As stated previously, proper planning associated with the integration of a new enterprise solution will ensure your selection satisfies the process improvement and cost containment needs of your business within the established budget, while achieving the required ROI.

I wrote this article for CIO Review Magazine-Corporate Finance Technology Special 2014 (April 2014)  The story can be found on page 50.


Author: Regis Quirin
Visit Regis's Website - Email Regis
Regis Quirin is a financial executive with 23 years of corporate experience, i.e. New York Stock Exchange, JP Morgan Chase, and GMAC ResCap; and 15 years working with small and medium-sized entities, i.e. joint ventures, start-up entities, established businesses. In 2014, Regis published "Redesign to Turnaround Underperforming Small and Medium-Sized Businesses" available via Amazon.