Stand up, and face the front of the room. Now turn around 360 degrees. You end up facing exactly where you started. The trick is to keep your eyes open as you spin, and be aware of what is going on around you.
It is exactly such a 360 degree view that allows you to determine which of your customers are most beneficial to your bottom line. You need to look not only in one direction (not just at revenue), but all around at your customer-facing activities.
A 360 degree view often focuses on customer segmentation, and how a company interacts with its customers through the marketing, sales and service channels. Let’s extend that to also include the financial impact of accounts receivable. How do you analyze the value of each of your customers today? Have you scanned the entire room – or at least all the details pertaining to each customer? What do you need to consider when determining who your most valuable customers really are?
- Order volume is important. But which products are your customers buying? Is a particular customer consistently ordering high-margin or low-margin products?
- Are there extra costs associated with the majority of orders placed by a particular customer, such as expedited delivery or non-standard features?
- Does the customer frequently return products, or ask for extra services over and above the warranty – at no charge to themselves?
- Does the customer pay? The full amount? On time?
A simplified example:
J. Watson is a sales agent at Firestation Supplies, Clothing & Meals (FSCM for short – a name that coincidentally has a striking resemblance to SAP’s Financial Supply Chain Management solution!). Watson has just taken two orders, both for fire engine hats.
- The first order was placed by customer RED (Red Engine District) for $1 million, for hats with a non-standard red color that exactly matches their engines. And they need them in three days, for Valentine’s day.
- The second order was placed by customer GREEN (Groveside Real Electric Engines, North) for $250,000, for standard green fire engine hats. The hats are needed in a month – for the annual St. Patrick’s Day parade.
Watson gleefully calculates his commission and goes to his manager, S. Holmes, to work out a plan to sell RED more products. Holmes, though, has been concerned; although RED has placed many large orders, they are also returning large quantities of products. The extra costs to expedite this latest order cannot be billed back to the customer under the current contract, reducing the margin on this order.
Holmes decides to now look at the accounts receivable impact. Thanks to a 360-degree view in his reporting, Holmes’ suspicion is confirmed. It is evident that RED is going over its credit limit with this last order. Customer RED has not been paying outstanding invoices, and several items are in dispute.
Holmes makes the following deductions:
- FSCM reporting shows that RED is not paying their bills. The collections and dispute departments need to prioritize this case to work through the outstanding invoices and disputes.
- GREEN has an excellent payment history, and their orders do not incur extra internal costs. The credit department should consider increasing their credit limit; marketing and sales should agressively market additional products to them.
For a particular customer, it’s not just about the revenue. All costs associated with the customer, from extending credit to providing service, need to be included in the analysis of which customers are truly the most profitable and valuable to your company. This should be a key element in your sales strategy.
As S. Holmes would say, “It’s elementary.”