Who is your best customer? Is it the one that pays you on time? Is it the one that just sends you orders without having to go through the sales process? What criteria do you use to determine who is your best customer?
Defining who your best customer is depends a lot on where your business is at in its operational evolution and its financials. Every business is different, and each owner/manager of that business must figure out what the “best” customer looks like. This is not a passive activity where you simply decide one day that this is what “best” looks like. This requires some real work on your part to understand what your business needs and what type of customer fits that need.
I worked with a Food Distribution Company that had grown quickly under the owner’s leadership. The business was running forward as fast as it could, but there were several issues operationally that kept it back, more on those details in another post. When I started to dig into the financials to figure out why cash was not bursting from every crack, I started to see a pattern of customer acquisition that went against what the owner had told me was their biggest selling point, “They buy from us because they believe in our story.”
“Who is your best customer and why?” I would ask the owner. “Oh, it is this restaurant group. They offer great food and a great price and lots of it. They always pay their bills on time. They are the best.” I then went to the person responsible for accounting and asked them the same question and got, “Oh yes, they are great! We do a lot of volume with them and they always pay early and when that check comes it, we all feel good because there is money in the bank.”
Sounds great, so if they account for the largest single source of volume and they pay on time, they are the “best” customer. So why is the company always struggling at the end of the month to pay its bills?
Digging into the financials I built a simple model of what profitability looks like, I calculated a “break even” point. I looked at all expenses and debts, calculated the monthly cash needs and offset that by the revenue per month on average. From that I then calculated the margins necessary to keep the company going and used that as a benchmark.
To my surprise, the “best” customer looked really good from an Accounts Receivable point of view, but all of their business was below the break-even point on margin. “No, that can’t be!” I was told by the owner. “They are great!”
But why are they great? They are great because you don’t have to chase them for money, and why would you since you are paying them 10 cents on the dollar to do business with you. This news did not sit well with the owner. He could not understand why I would be so negative towards his best customer. I came back with, “I have zero emotional investment in that customer, all I did was look at your financials to see how much money you make from each of your customers and in this customer’s case, you are losing money.”
Numbers don’t have an agenda; they simply reflect where your business is at the moment. You can create a “story” around the numbers and feel better about your decisions, but you better make sure you are using sound criteria to determine what “good” means.
After several weeks of analysis and spirited conversations, the owner decided to raise prices for that customer. Not big changes, just small incremental changes that would eventually result in a “break even” situation. A couple of months into the process, the customer called and asked why prices were going up. The owner responded that there had been price increases for the items, and he was simply passing those costs along, but assured the customer that they were getting the best price of any other customer. That was true, even with steady price increases, the restaurant group was still getting a better price.
A couple of months later, the overall margins for the business had gone up and the bank accounts had a bit more money in them to pay some past due bills. Not the amounts of cash that given the volume you would expect, but a considerable improvement from previous months.
Defining your “best” customer is an important exercise and often times a painful one. If you simply use a “pain” factor to determine who it is, you might be selling below margin just to avoid uncomfortable conversations about payments. This at first seems like a good thing, but in time you might find out that you gave away your business just to avoid an uncomfortable conversation.
So who is your “best” customer?
If you want help understanding your numbers, or if you simply don’t have any financial tracking of your business, don’t hesitate to reach out at rick@gramatges.com and ask questions. Who knows, you might find out that your best customer is really the one you want to keep and you can ignore all the rest and still make more money.
Gramatges Consulting 