You have heard it before: 80% of your business comes from 20% of your customers. And this is generally a good metric to use, especially if you are interested in turnover, which in turn better positions you in the supplier chain, supplier priority, and supplier credit.
Generally, you would also associate higher turnover with higher margins, so as turnover increases then profitability will trend the same way; but this may not always be the case.
Big accounts are good to have; they instil a level of confidence that there will be a regular demand for your goods or services. Going hand-in-hand with securing a large account also includes an additional overhead that you will need to factor in to accommodate it; an overhead that may not necessarily be present for some of your other lower turnover customers. This overhead might be higher priority servicing or smaller margins or some other offered incentive to keep the vender/customer relationship strong and to create a dis-incentive for your account to seek your goods and services elsewhere. These incentives, although good for your customer actually cost you money and can, if not managed correctly, jeopardise your other income streams and other customers.
This can be a common trap for all suppliers and can work throughout the B2B chain.
We all have margins that we need to maintain to ensure profitability. Profitability is a simple equation that compares what it costs for us to supply/produce/hold/market a product or service and the price that we are able to on-sell it for.
No doubt about it, your biggest problem is managing this delicate balancing act.
On the flip side, non-major accounts, such as individual purchasers, can (and do) provide some tangible benefits that should not be ignored.
Regular Income Stream A small customer can provide a regular income stream – it’s just that this is done with many different transactions. We need to change our definition of individuals and instead see them as a collective “Individual” group. This is certainly made easier if this group has come common characteristics; these may relate to the commoditised product or service that you may be offering.
Higher Margins We all get squeezed by the people who purchase more product from us. This is not the same for smaller individual customers who may do infrequent transactions. Their negotiating power is less when compared with the bigger players therefore margins can be higher (or less eroded) when negotiating a price with this group.
Homogenized Selling If the same process can be implemented to service a large number of customers, then economies of scale come into play and the overheads associated with the delivery of the sales process will become cheaper to implement and maintain. The same will apply with hidden costs associated with the product that is being purchased – things like holding costs, forward purchasing predictions, etc all come into better focus with these customers.
Reduced Risk Big accounts are great when they are active, however they can be a big hole to fill if they disappear. A large account holder is interested in (in no order of priority):
The quality of the goods/service
The fit of the goods/service
The (perceived or not) value for money
The product/service availability
The product/service market movements
The product/service evolution
Some of these points you have direct control over and some yu do not. These are all failure points and if you are unable to deliver because of one or more of the above points, through sometimes, no fault of your own, then the big account holder will probably look elsewhere for these goods and/or services. Although it should not be part of your business plan, you could probably survive pissing off one of your smaller customers whereas it might be totally different story of you lose a big player.
Cashflow Big accounts expect you to become a defacto credit provider. Although terms might be COD at the beginning, it is not unusual for these accounts to quickly become 7, 30, 90 days nett. You need to wear the finance costs whilst your customer increases the likelihood of on-selling the goods/services- effectively getting paid before paying for the goods. You also accept the risk if they go under – you are an unsecured creditor.
You can be proactive about the style of customers you seek. Sometimes you will subconsciously pick your customers (i.e. calling yourself Home Plumbing Services will probably not attract too much commercial work). Sometimes the type of customers that you have just fall in your lap. Ultimately, spreading your risk across a number of different customer types is probably better than concentrating on one style of customer only.
Just ask yourself occasionally: Are all your eggs in one basket?