It’s essential to choose the right customers

The story of Beta and a consultancy. What and how much to learn from an actual case.

BETA SRL IS AN INTERESTING COMPANY LOCATED IN THE NORTH WEST OF ITALY created by a brilliant salesman who, in the '80s, made the big leap from sales rep. to entrepreneur. The company imports gardening articles from the Far East, especially from China and India: a wide range of products, from simple ones (stakes and wire mesh) to the most sophisticated ones, such as lawn mowers, small tractors, pumps... thanks to miniaturisation these products are technologically advanced but delicate at the same time, requiring servicing. The new entrepreneur soon understood that it was necessary to combine pure business, with production and maintenance.

Out of necessity hence he created the workshop that immediately revealed itself as a relentless generator of fixed costs. “Our Man” seriously addressed the problem and solved it, launching an additional business of creating parks and gardens. In this way the necessary technical personnel in the workshop could be used in the low season in the work yards that Beta opened up in the villas of wealthy individuals or under contracts made with Local Public Bodies.

Everything OK then? In a certain sense the briefly described succession of events was inevitable, almost a set course. The maintenance workshop addressed the need to provide the minimum acceptable customer service, essential for selling the high added value products, and the Parks and Gardens Division helps to reduce the fixed costs, something that every self-respecting company is required to do, simply a question of good sense. Doing thus, Beta built a broad and diversified customer portfolio: the original nucleus, composed of retailers of materials for the garden sector; individuals who purchased a tractor long ago, where a technical assistance service was required; the wealthy owners of high-level residences, spending considerable figures for a high grade garden, requiring attention and a suitable contact strategy. Lastly the highly sensitive group, that of Public Administrations with all their complex procedures for assignments of contracts and subcontracts, certification and payment difficulties.
 
Hence a tumultuous development was witnessed, where the entrepreneur's attention was immediately absorbed by the imperious necessity of securing a steady stream of revenue that is vital to "feed the machine" that every year becomes more and more voracious and less profitable. Turnover soon becomes a true company obsession, transmitted through the organizational chain to the sales force and technicians. The vendors, numerous compared to the real organizational capacity, had and have the bad habit of taking orders at big discounts, providing the Sales Office with a fait accompli. The same policies of price and service have been consistently applied to the different customer groups, generating serious perplexities. Meanwhile Beta’s annual budgets speak of returns just sufficient to cover the fixed costs, with profits fluctuating around zero. Hence corrective action needed to be taken ...

The Beta story (told as a side issue) is a real one, and the writer of this piece started up a consultancy project, installing the basic procedures of management control to identify the mechanisms of formation of company profitability that began to reveal the nature of the problem. The entrepreneur was in good faith, believing he would be able to sell at high prices (about a 30% margin), but the overall margins according to the cash flow statement were 12%, hence just enough to cover general overhead costs which amounted to 11% of the value produced. The first diagnosis of the entrepreneur was that of "having fixed costs that are too high", hence a harsh treatment of cuts was applied, that nearly cut the legs of the company's ability to perform its tasks. Something not unlike what is happening in some European countries with excessively strict austerity policies.

Through analysis of the Direct and ABC costs, we hence developed a coherent picture of profitability generated by each customer, each product and each market in the interests of the Company. It appeared clear that the combined effect of a misperception of the costs - the employer virtually only considered the cost of staff, neglecting other sturdy direct costs - and an excessively lax discount policy, the actual margin was dramatically lower than the 30% that “our man” thought he would be making. The fact is that in its frantic search of whatever revenue it could get Beta had "taken on board" customers of all kinds, from those truly attentive to quality and service (who cost Beta too much to satisfy) to those who only cared about prices (which it was ruinous to serve at their conditions). The diagnosis was clear: Beta had too many customers unsuitable to its vocation, which was primarily the provision of an average standard of quality and service.

By applying appropriate Marketing Metrics we also discovered that Beta lost many customers once loyal to them and, simultaneously, "took on board" new customers to replace those lost by way of offering heavy discounts. We compared the margins generated by customers and their loyalty (by drawing up a special scale for evaluating the "loyalty" of retailers), to find that the company was literally kept afloat by a small group of loyal retailers. Many customers did not provide margins sufficient to cover the fixed costs, and many even provided negative margins.
The measures were drastic, but effective, devised together and compiled with the consummate business skill which the entrepreneur was once more able to give a brilliant performance: a completely revised pricing structure was introduced,  creating a precise segmentation and leading to the drawing up of a policy suited to the buying patterns of the various customer segments, all of which was analysed, coded and communicated to agents and sales staff.
The moral? The key to success therefore lies in serving the right customers ... the right one for you or us that is.

By Roberto Furlanetto,
Consulente di Direzione   
[email protected]