Tough Call: The case of the unprofitable large customer

Tough Call
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Your rep (#1 in sales volume) is threatening to leave and take your biggest customer (#1 in sales volume) to the competition if you insist on profitability. What would you do?

Your company is one of the leaders in your market for serving professional builders, and your team of outside sales reps have established really strong relationships with their customers. That turned out to be a very good thing in 2021, when prices spiraled out of control and product availability was worse than you’d ever experienced. Despite this operational rollercoaster, you and your management team decided mid-year to get serious about getting the most from your powerful new software platform.

Since your sales reps have great latitude with pricing, you chose to focus on cost to serve per individual customer. You had a hunch that this analysis would reveal some surprising facts, but you were floored when you learned that your single largest customer, Big Bob Homes, contributed next to nothing to your bottom line. How could that be?

As it turns out, not only does Big Bob Homes enjoy the most aggressive pricing of any of your customers, they’re also very high maintenance, especially when it comes to product deliveries. In fact, your delivery team averages 2x to 3x more trips to their jobsites, compared to similar customers. Since they know that they’re your biggest customer, they play that card every time they need 10 2x4s or a couple boxes of nails rushed to a jobsite.

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You knew that it cost more to serve Big Bob Homes, but when the analysis showed that the combination of excessive deliveries and extremely thin margins turned them into, essentially, a break-even customer, something had to change. In a conversation with Phil, your long-time leading outside sales rep, you shared the results of the analysis. He wanted nothing to do with these newly uncovered facts. “I’ve been working with Big Bob Homes for years, and that work has turned them into our largest customer. With the amount of money they’re spending with us, there’s no way we’re barely breaking even.”

Assuring him that you were as shocked by this as he is, you explained that some changes were needed in order to turn them into a profitable customer.

“If you’re telling me that I’m going to have to raise their prices, after how loyal they’ve been to us… And that I’d have to limit their deliveries to what we provide our standard builder customers, well, that’s just not gonna happen. I take care of my customers, and I’m definitely going to take care of Big Bob Homes,” he said, as he stormed out of your office.

The next day, Phil came into your office, closed the door, and said, “I’ve been thinking a lot about the situation with Big Bob Homes, and here’s where I’m at. If you insist on higher prices and/or fewer deliveries, then I’m going to say yes to the job offer with a competing yard—and I’m going to take Big Bob Homes’ business with me.”

Essentially, your leading sales rep (by volume, anyway) is threatening to leave and take your biggest client (again, by volume) if you make the changes necessary to turn Big Bob Homes into a profitable customer. What would you do?

• STAY THE COURSE. There are worse things than breaking even on a customer. Help Phil off the ledge, and back to the way things have always been. Share of market matters, too.

• CALL PHIL’S BLUFF. Explain that profitability is required for you to be in business, and to afford to pay Phil and his colleagues. You’d hate to see him go, but these changes will happen with or without him.

• SET BOUNDARIES. Set limits in your software system for daily deliveries, and also for margin exceptions. Phil won’t like it, but he’ll realize that you were serious, and he’ll accept it eventually.

• PAY ON PROFITABILITY. Change the pay structure so that salespeople are paid based on the profitability of each customer. When Phil sees that low margins and high cost to serve hit him in the wallet, he’ll change his ways.

What would you do?

Something else?

If you’d take a different plan of attack, email your suggested solution to James@LBMJournal.com. If we publish your reply, we’ll send you an LBM Journal mug.

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