- November 4, 2020
- Posted by: David Marshall
- Category: Management, Measurement
I found an old email from a friend, Richard Coyner, who said:
“I cannot tell you how many times I have said over my career ‘Don’t bother measuring something if you are not going to manage it.'”
There’s an old saying that you can’t manage anything unless you do measure it, but it will take effort and resources to create a measurement system. And if you don’t have the inclination or the personal discipline to actually analyze the measurements, don’t bother spending the money.
Doing something just for the sake of doing something has no value in any business, whether it’s manufacturing, a service business, or any other kind of business. The benefits of measuring are immense. You can identify where and why your costs are out of whack, where people are out of whack, and which of your products are on the downturn.
Measurement will even tell you when it’s time to fire your customers.
This is Why Measurement is Important
Your biggest customer in dollars may not be your best customer. If you only look at how much money you’re bringing in, you may be missing the rest of the story. You could be over-discounting to them and therefore not making as much money as you are on your other customers. It could be that your other customers are actually subsidizing this big one and you could increase your profits just by firing this one customer.
I’ve had to have that conversation a couple of times over the years. For example, doing a Pareto analysis on our customer profitability, I was able to find the ones that sucked up a lot of resources and didn’t pay back that much. And I had the talk that either raised their prices or got them off our books.
It’s certainly not a conversation anyone wants to have, but you have to decide who’s going to survive, you or the customer. And it needs to be done by one of the executives, or at least the sales manager. Generally speaking, the salesperson is the worst person to have that conversation; it has to be a business-to-business conversation.
It’s a business conversation, and not a sales one, because you have to reconcile in your mind that it’s highly possible you’re going to lose this customer. They’re likely to shop around for better prices anyway. If they could find someone else to undercut you, they’ll do it.
That is, unless the products you’re selling are proprietary or you have the best product on the market. They can’t shop that around, because they don’t want to lose their own customers. But if you’re selling proprietary or best-of-the-market products, why are you discounting them so much?
That’s one of the benefits of being in a niche business: You have a higher probability of having proprietary products and developing product preferences in the end user.
For example, Petrobras is the state oil company in Brazil. They had discovered one of the biggest oil reserves in the world offshore, and were looking for a fiberglass liner that would go into a carbon steel product so they didn’t have to pay extra for high-grade chrome products.
I spent six years and half a million dollars getting them to approve my product. And it ended up being the only fiberglass lining product Petrobras had approved. Anyone else would have had to have gone through the same pain and to get there, but they didn’t have the intestinal fortitude. That meant, we knew we didn’t have to give huge discounts on the product at all. We knew they needed us, and they knew it too.
How to Fire Your Customers
Back to the original question: Who do you call for that conversation? How do you even broach the subject?
It’s certainly not a conversation you have over the phone, it’s done face-to-face. I can remember two times in particular where I had to call the owner of the business and schedule a time to talk about how we had to raise their prices or cut them off as customers.
In one case, the owner said that we had been very loyal suppliers to them and they had had zero defects and zero costs in using our product, and felt that an increase was not unreasonable. We were able to raise our price to a more appropriate level and keep them as customers. Rather than eliminating them, we were able to generate more revenue.
In another case, the guy exploded and said I was a rogue and that he didn’t want to deal with me. They were going to sever our business relationship and go elsewhere for their products. I gave him a return authorization to return all of his inventory, which he apparently no longer wanted.
Except he didn’t do that because they had end users who were using our product, and they were not prepared to change from ours to something else. If he replaced my product, there was a high probability that he would lose those customers himself.
In the end, he didn’t sever his relationship either. He swallowed hard and had to suck it up. He may not have been happy with us, but he knew he literally needed us more than we needed him.
Again, you need to have a niche product or have the best product available if you want to have any leverage. If you don’t, the customer is in a position to hammer you, not the other way around. If you’re in the commodity business, you’re at the mercy of the customer who can just go somewhere else to buy the same thing at a lower price.
But if you have a product that very few people can get, or you’re the only approved supplier they can have, you’re in a much better position.
And you’re only going to figure this out by understanding your market, and measuring every aspect of your performance.
I’ve been a manufacturing executive, as well as a sales and marketing professional, for a few decades. Now I help companies turn around their own business, including pivoting within their industry. If you would like more information, please visit my website and connect with me on Twitter, Facebook, or LinkedIn.
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