Companies often get into the habit of growing by accepting any and every customer they can and modifying their territories and/or product offerings to meet new customer needs. Over time, this creates a disjointed customer base where some customers are profitable to the business and others are not. As a best practice to help avoid this, it's important for a company to perform a customer review which is similar to a vendor review you might do on a periodic basis.
Profitable or Not Profitable. That is the Question.
A thorough customer review will look at:
Profitability of the product/service for each customer or customer groups for large customer bases.
Cost to service the customers on a pre-Selling, General and Administrative Expense (SG&A) basis.
Specific SG&A requirements of the customers to determine if they are consuming a disproportionate amount of back office resources.
The end result of the review will help quantify and determine which customers are profitable and not profitable for a company.
Once the non-profitable customers have been identified, key stakeholders such as operations, accounting and sales can perform a deep dive to determine if modifications can be made in the sales process or pricing structure to make them more profitable. At this point management will need to make the hard decision: whether or not to separate from those customers who cannot be made profitable. After completing this process, the end result is often positive with just a slight decrease in revenue and larger increase in gross and net margin.
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