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Is the Customer Always Right ... For Your Profitability?

by Dave Hannon

October 4, 2012

By Dave Hannon

No matter what your role in business, you've probably been told in some way, shape, or form that "the customer is always right." But let's face it -- it's not true. In fact, some customers are just a pain in the neck. You know the ones I'm talking about. No matter how hard you work or how much attention you give them, it's just not enough. They constantly change their mind. They hem and haw over the most minor details. They distract you from your larger or more loyal customers. And in the end, sometimes they wind up buying from your competitor instead.

It's maddening. We've all fallen victim to it at some point. And you know what? It's bad for business. In the time you spend serving that one customer, you could have served many other customers and brought in more money to your business. It's a resource drain. And in fact, in some cases, you may be losing money by serving that customer, depending on the cost to revenue ratio.

But what do you do about it? Do you analyze that ratio to decide if this customer is costing your company too much? Do you "fire" the customer? Or do you do take the "any money is good money" mentality and bend over backwards for these customers on the job (and probably scream about it at the top of your lungs in the car on your way home)?

Well there is a solution. (Both a "solution" in the traditional sense as in a concept to solve a problem and a "solution" in the SAP sense). The concept is called customer stratification and it's pretty much what it sounds like. You analyze your customers, g roup them into categories and then determine how much time and effort you should devote to each group to improve your company's profitability. Although it's not as simple as that.

For example, some customers may be something of a resource drain and spend very little with your company today, but they may have big potential in the future so the effort may pay off down the line (assuming your vocal cords survive those rides home). And determining the right amount of effort to dedicate to those customers today requires some true analysis.

So how do I know so much about customer stratification? The concept was explained to me in great detail by John Mansfield, Vice President of Business Development at industrial distributor Graybar, who just happens to be the cover story in the latest issue of insiderPROFILES. Graybar was introduced to the concept of customer stratification when a company executive read a groundbreaking piece of research compiled by Texas A&M and published by the National Association of Wholesaler-Distributors. From there, customer stratification became a companywide initiative including detailed training and technology development.

In fact, Graybar didn't simply buy into the concept of customer stratification as a way to improve profitability -- the company leveraged the data in its SAP ERP to gain real-tiem insight and is now co-innovating a new solution suite with SAP, which is powered by SAP HANA.

It's a unique and intriguing concept for many industries to consider. And frankly, the timing couldn't be better, as companies in all industries continue to seek to improve profits with limited re sources.

And, oh, one more thing: it works both ways. Somewhere, right now, one of your suppliers may be considering your company in its customer stratification model and putting you into a box. So you might want to take a look internally to make sure you're not on the "resource drain" list as a customer as well.

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