Customer Stratification for Manufacturers: When Cost to Serve Exceeds Profitability

November 8, 2023
Thomas F. Fitzgerald, CPA 

Best Practices for Boosting Sales Margins.

A survey by Earnest & Associates (E&A) has affirmed the critical need for distributors to spend less time with their poor, profit-draining customers – a key to boosting sales margins. Over one hundred decision makers at small to medium sized businesses (SMBs) in the wholesale/distribution trade participated in the survey.

When asked to rate their organization’s sales challenges, 94% of respondents agreed that ‘We need to spend less time with poor customers’ is Important or Very Important. No doubt many distributors are keen to allocate their scarce resources to serving customers who contribute more to their bottom-line profitability; and less with profit-draining customers whose Cost to Serve exceeds their profitability.

One of the survey respondents is Mark Bray, Operations Manager of ACR Supply, North Carolina’s leading HVAC and Refrigeration wholesale distributor. Mark talked about the challenge of identifying the company’s least and most profitable customers. “We had no way to sort our customer list in a way that would help us determine how much time and energy we should devote to each,” said Mark.

Our strategy with Marginal customers is to drive them to our eStore where we can reduce our Cost to Serve.

To gain control over this critical issue, ACR Supply implemented E&A’s ProSales, a Customer Stratification analytical tool, to leverage data from its ERP system. ProSales evaluates key factors including Buying Power, Cost to Serve, Loyalty and Margins to calculate the profitability of individual customers. ProSales has empowered ACR Supply to change its ‘Marginal’ or profit-draining customer’s behaviors for the better. “Our strategy with Marginal customers is to drive them to our eStore where we can reduce our Cost to Serve,” explained Mark.

ACR Supply’s sales resources have been tasked with educating customers about the advantages of using the company’s eStore. “When visiting onsite, our sales representatives step customers through the setup process: creating logins, setting up lists of frequently purchased items, pickup and delivery options, and so on,” said Mark. “We’ve also tasked our inside salespeople to contact Marginal customers and educate them about the eStore. We can use WebEx to demonstrate the site. We’ve found that many customers like using the eStore where they have the convenience of ordering from us whenever they want to,” continued Mark.

Online self-service has lessened the burden on ACR Supply’s inside and outside sales/support staff. ACR Supply has successfully engaged its Marginal customers in a more productive and cost-effective manner than before. Spending less time with poor customers has meant that ACR Supply’s highly-skilled outside and inside salespeople can spend more time supporting their most profitable, ‘Core’ customers.

“Now that our customers can self-service by entering orders online, our outside salespeople have reclaimed the time they used to spend punching in customer orders. This allows our salespeople to allocate more time visiting high-value accounts. It is important for us to deepen our relationships with the Core customers who contribute the most to our profitability,” said Mark. “Additionally, our sales counter people can be more attentive to the foot traffic in our stores because there are fewer inbound phone calls. The more that customers order from us online, the more resources it frees up.”

ACR Supply’s experience proves that distributors who know how to leverage technology can turn poor customers into good customers. “Marginal customers can become profitable customers,” declared Mark. “The key is to know who they are. Then you can take the necessary actions to change these customer’s behaviors for the better.”

Thomas F. Fitzgerald, CPA
Thomas possesses over 40 years of experience driving proven results in corporate financial management, spanning the scope of strategic planning, merger & acquisition, market/product targeting, sales plan integration, operations control & review, cash flow management, capital acquisition, income tax planning & compliance, wealth preservation planning, and enterprise resource planning design...
Read Full Bio

This field is for validation purposes and should be left unchanged.