June 27, 2017

Article 4.10


More companies are starting to discover the huge, customer-strategy insights that come from doing customer profitability ranking ("CPR") reports using even the simplest of activity based costing methods. (For more on how to do rankings and the insights to this link: http://www.merrifield.com/articles/Identify_Customer_Niches.pdf.) The CPR insight that yields the quickest benefits for the least amount of time spent is turning losing accounts into winning ones. But, few companies follow through on this opportunity, because they donít have the alchemy skills in house to turn the lead accounts into gold. Read on to find out why they donít, and how they could.

First though, a bit more on losing accounts: often as much as 60% of all active accounts can contribute minor to unbelievable losses for a company. The bottom 1% of all of the accounts will typically cost a company a magnitude of 20% of their existing operating profit. These accounts, as a group, are a big contributor to the smallest 40% of all company transactions that yield less than 5% of the gross margin dollars, but still chew up 40%+ of transactional activity costs.

The super-loser accounts are often big name or big potential accounts, each of which is applying its own perverse purchasing philosophy to the unsuspecting supplier. A few losers may be using their size to cherry-pick a companyís service capability and not pay for it, but the rest have been unknowingly pursuing purchasing assumptions and processes that cause big transactional costs for both parties.

What would you do with a list of 5 to 10 super losers per profit center? I know companies that have:

  • Explained activity based costing and the ranking reports in great detail and repetition to both profit center managers and sales reps (without changing the sales reps compensation plan that is tied to sales or gross margin and not estimated operating profit per customer).
  • Incorporated the big losers into a one-page, monthly reminder report for all profit centers. (See "exhibit 30" and "article 2.20" at www.merrifield.com.)
  • Put freezes on hiring any new people until losing accounts are transformed, because big reductions in order activity creates operational slack that eliminates the need for extra people.
  • Assigned undiplomatic managers to visit losing accounts who have then proceeded to alienate many more accounts than they have transformed and grown.
  • Mostly wrung hands and gnashed teeth about low-to-no follow through.


Most managers Ė when they first look at CPR reports Ė donít believe how extremely profitable and unprofitable the top 1% and the bottom 1% are respectively. The top 1% of the most profitable accounts can account for 35% to 50% of a profit centerís annual, operating profit, and these accounts will sport a profit rate as a percent of sales that is 3 to 4 times what the profit centerís return on sales is. (What are our renewed programs for not losing them and cracking 1 to 4 others like them?)

The super losers are also surprises, because their order activity Ė 1 to 10 orders a day Ė is usually considered "good", plus they are often friends due to lots of interaction opportunities. Because managerial and sales time allocation for customers is way out of line with where the report says our bread is being both buttered and eaten, what manager or sales rep wants to believe that they have been naïvely misdirecting their time?

The first, defensive response from CPR report recipients is to attack the activity based costing assumptions used to generate the reports in an attempt to minimize the losses for the heavy-lead accounts. But, three big truths hold sway:

  • The only way that an account can be at the top of the report is to have huge annual margin dollars and relatively few transactions; these are strong winners no matter what cost shifting and activity cost assumptions are tried.
  • The only way that an account can be at the bottom is to have huge transactional activity and relatively low margin dollar contribution. They remain super losers no matter what new cost assumptions are used. In fact, when more detailed analysis is used for big losers, they are often found to be even worse due to non-moving, special stock, remote delivery costs, etc.
  • If anyone wants to use incremental cost assumptions, then the rest of the overhead costs assigned to the accounts in dispute must be reassigned to all of the other accounts which makes the next few slices of super losers even bigger losers. All costs must be (re)assigned in every alternative analysis.

The second line of defensive reasoning is that: all of our operating costs are fixed, so that any incremental margin gains or losses directly impact the profit line. With this logic, if we drove away a loser with, for example, $2000 in margin and $17,000 in hypothetical transaction costs, we would take an immediate $2000 hit to the operating profit line and would have $15,000 of idle, canít be re-deployed overhead.

The rebuttal to this argument is that: we can persuade some of the customers to re-think how they buy to not only lower our transactional costs to serve, but their total procurement costs to buy. If we should choose to selectively drive away 2% of our gross margin dollars, for example, to free 10% of our transactional activity, then our operational slack could be dynamically shifted to other customers with a profitable sales growth future. If we are struggling to give existing, best customers quality service and to find the time to work on improvement agendas, we could re-deploy all newly freed operational slack in a positive tradeoff way.

At an extreme, if we have a profit center with lots of losing customers and some marginal employees, we could shape-up-or-out losing accounts while monitoring transactions per day per fulfillment process person. We could then know when to lay off the least productive person(s), so that we would be reducing operational expenses faster than losing incremental margin dollars from departing customers. Profits would grow while headache employees and customers shrink.


Arguments aside, who on the payroll is capable of getting an audience with honchos at losing accounts to then convince them to change their inefficient purchasing ways often with some innovative, customizing process accommodations from us? This person needs to:

  • Have a title that will get them in the door;
  • Be fluent with both total selling and purchasing costs;
  • Have experience in sketching out existing buy-sell processes as well as new (innovative) ones that are win-win; and,
  • Conversational and problem-solving skills that can eventually convince customers to change their flawed, often unspoken purchasing assumptions. It takes great skill and tact to help customers see the "hidden costs" of their flawed ways that have been creating unnecessary high costs for both parties.

Sales reps are out of the running for this assignment. At large accounts, they tend to call on full-time purchasing people who donít have the purview to examine and change purchasing beliefs, policies or procedures, they just execute what has always been and deny any problems. Even if a rep could get into a meeting with a honcho, they would be going over their best friendís head to discuss liquidating purchasing transactional activity cost which also happens to be their friendís job. Although buyers do worry about more effective purchasing systems, their freed time and talent can also be re-deployed more productively than tending to unnecessary paper piles.

Some Branch Managers can succeed with big losers that are so friendly that they are happy to change to help the branch. But, most branch managers donít have the education, experience and confidence to do an artful job with the rest, so they avoid them.

The designated alchemist is usually the CEO by default. An unusual, but effective alternative answer is to retain an outside consultant, experienced in lead-to-gold customer alchemy, who can work with a "vice president of customer supply chain solutions" in training. These two can tackle the lead-2-gold accounts at one or more profit centers and then write up case studies and guidelines for how to "do it" turning an "art" into a "science". At some point, the trainee can then proceed to take care of the super losers at all other profit centers and then do on-going maintenance as needed after quarterly analysis.

Lest you think that all lead-2-gold visits can end happily ever after for both parties, hardball is sometimes appropriate with about 20% of the super losers that are cherry-picking a companyís unique items for sale or their most convenient location. These accounts are, otherwise, buying the big volume, on a profitable-to-the-supplier basis from the competition. Once an Alchemist has determined that cherry-picking is the game and that the customer has no intention of changing, then unilateral changes in pricing and terms to make the customer profitable is the answer. The cherry-pickers may threaten to stop all buying, but they usually resume their activity on the new terms, because the company still has, after all, the unique cherries that the customer needs.


Every customer, super losers included, intuitively wants to buy their goods at the lowest total procurement cost, and most actually want the supplier to make at least a minimal profit. The problem is that all accounts are not clear about what total procurement cost is and how well they are really measuring and achieving it. We need to help them change from unintentional lose-lose practices to win-win ones.

Roughly 80% of lead accounts can be converted into gold ones with great alchemy skills. Many can also buy more volume than before, because there is no more co-creative opportunity when two honchos sit down to re-think how they are doing business together. The remaining 20%, who are either cherry-pickers or total hard heads, will bluff and bluster about, but often comply with, new pricing and terms. The ones that do leave will paralyze another competitor that doesnít know its transactional economics. The freed operational slack will automatically flow to servicing the rest of the account base with good upside results.

If your firm would like to: relieve operational stress; do a better service job for accounts that matter; start growing personnel productivity and operational profitability; and win new business from old accounts, then: why donít you quickly turn lead accounts into gold?

Ó Merrifield Consulting Group, Inc., Article 4.10

D. Bruce Merrifield, Jr.

April, 2005