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Profiling Your Best Customers

In manufacturing, having an objective way of profiling your customers is important for two reasons. First, knowing how to profile the best customer—or ones with future sales potential—is an essential step in finding new customers and markets. Second, it is also helpful to profile bad customers—i.e., customers who aren't profitable, don’t pay their bills on time, or continuously pressure you to lower prices below an acceptable margin.

To get rid of these bad customers requires finding replacements, and before you invest in this strategy, you must be able to explain to your reps what kinds of customers you are looking for. This is best accomplished by examining your current and past customers, using the following step-by-step process:

1. Begin by printing a list of all accounts sold in the last 12 months (this may vary from 1 to 3 years) by sales volume—from largest to smallest. It is also very helpful to include the average profit margin percent of each account before overhead. This is known as the contribution margin, or sales minus direct materials and direct labor. Getting an estimate on the average margin for a customer account requires aggregating cost information from work orders and jobs. This may appear to be a difficult task, but do it anyway; the information will pay off over and over again. If you can’t provide margin information, then begin with a list of customers by sales.

2. The government has devised a method of classifying all products with a six-digit code Known as the North American Industrial Classification System ( NAICS ), it can be found online at www.naics.com. Your next step is to assign NAICS codes to each customer account. In order to do so, you'll need to know what the customer manufactures—the NAICS system designates specific sub-industry markets.

3. Next, you have to determine which of your customers are strong and which are weak (marking each with a plus or minus). Base your judgment on the answers to the following questions:

• Is the customer profitable?

• Does the potential exist for significant future revenues?

• Do they truly value what you do well?
• Are they a springboard to other like customers (referrals)?

• Can you serve them better than competitors?
• Are they financially healthy?
• Do they pay their bills on time?
• Do indirect expenses reduce your gross profitability? Examples of these include returns/allowances, field service, special engineering, credit terms, complexity of quotes, and inventory demands.

4. Go through the list of good customers (those you maked as pluses), and you can easily determine the ideal customer profiles with the best future sales potential. And by referencing their NAISC codes, you’ll be able to find more like them.

5. What to do with the customers in the minus category? You are entitled to a fair margin. And good customers—even tough ones—will recognize you, too, are entitled to make a profit. All manufacturers should be working at ways to further reduce costs through new manufacturing methods. This is another way for you to improve margins. But, those who will not let you make a reasonable margin, for whatever reason, are probably not customers you will want long-term.

This process is very important for manufacturers to face up to a bad customer, as well as for those manufacturers who need to find new customers and markets to grow. The point is, it's better to go on the hunt for a customer that sees the value of your price then to continue accepting losses, or to hope for some manufacturing miracle that will change your margins short-term.

And in the end, you really can't change the sales strategies until you can tell the sales department the type of customer you are looking for.

Mike Collins is the author of "Saving American Manufacturing" and its companion book, the "Growth Planning Handbook for Manufacturers." To learn more about the author or these titles, visit www.mpcmgt.com.

Source: Sales & Marketing Management