Manage customers for profits not just sales)
Benson P. Shapiro, VKastuh Rangan, Rowland T. Moharty, and Elliot B. Ross
High sales volume does not necessarily mean high income, as many companies have found to their sorrow. In fact, profits (as a percentage of sales) are often much higher on some orders than on others, for reasons managers sometimes do not well understand. If prices are appropriate, why is there such striking variation? Let's look at two examples of selling and pricing anomalies: n A plumbing fixtures manufacturer raised prices to discourage the "worthless" small custom orders that were disrupting the factory. But a series of price hikes failed to reduce unit sales volume. A study of operations two years later revealed that the most profitable orders were these custom orders. The new high prices more than compensated for costs; customers weren't changing suppliers because of high switching expenses; and competitors had shied from short runs because of the conventional wisdom in the industry. D A prominent producer of capital equipment, realizing it was losing big sales potential in its largest accounts, started a national account program. It included heavy sales support with experienced account managers; participation by high-level executives; special support like applications engineering, custom design services, unusual maintenance work, and expedited delivery; and a national purchase agreement with a hefty graduated volume discount. Customers, however, viewed the program as merely a dog-and-pony show, having no subBenson Shapiro, Kasturi Rangan, and Rowland Moriarty are professor, assistant professor, and associate professor of business administration, respectively, at the Harvard Bnsiness School. All teach marketing. Elliot Ross is a principal in the Cleveland office of McKinsey &) Company. He focuses on strategy formulation vdth industrial clients.
stance. To convince the skeptics, top executives personally offered greater sales and service support and even more generous discounts. Sales finally turned upward, and this "success" justified even higher levels of support. But profit margins soon began to erode; the big national accounts, the company discovered, were generating losses that were large enough to offset the rise in volume and the profitability of smaller, allegedly less attractive accounts.
It costs more to fill some orders than others. Do your prices reflect the differences?
clearly these two companies discovered that it costs more to fill some orders than others. The plumbing fixtures executives raised prices precisely because they knew it was costing them more to fill small custom orders. The capital equipment company willingly took on extra costs in the hope of winning more sales. Management in both companies recognized that their price tags would vary, the first from boosted prices on custom orders, the other because of volume discounts. But executives in both companies failed to see that the cost and price variations would cause profound differences in the profitability of individual accounts and orders. Many companies make this mistake. Managers pay little attention to account profitability, selection, and management. They seldom consider the magnitude, origins, and managerial implications of
Harvard Business Review
profit dispersion. In this article, we examine three central aspects of this important factor: Costs to suppliers Customer behavior Management of customers
Costs to suppliers
Profit, of course, is the difference between the net price and the actual cost to serve. In terms of individual accounts and orders, there can be dramatic differences in both price and cost. Despite legal constraints that encourage uniformity in pricing, notably the Robinson-Pa tman Act, customers usually pay quite different prices in practice. Some buyers can negotiate or take advantage of differential discounts because of their size...