How to improve profitability? - give customers a “staff appraisal”

Mike Southon is essential reading in the FT on a Saturday and his latest entry makes some really useful points for business students…

The essence of Mike’s argument is that, over time, some customers can become unprofitable as they take up increasing amounts of time, negotiate better deals and get stuff for free which they might otherwise pay for. Some customers turn from being profitable to loss-mkaing, once all the operating costs associated with managing the account are taken into account.

Mike makes a great point about where a business focus should be in a downturn:

“In a difficult market, it is much better to focus on generating extra revenue from your existing customers, ensuring that you focus your best efforts on the most profitable accounts.”

A neat idea is explored. Giving major customer accounts a staff appraisal-style review to see whether they remain worth keeping. If a customer cannot be served profitably, then let them go. That’s a difficult message for a sales person who is remunerated/incentivised based on the value of sales achieved (rather than profit) - but it makes sense.