Your salesman lands a big account with a well-known retailer and you’re ecstatic. It’s what you’ve dreamed about for so long. You rework your sales forecast and you can’t believe what the final projected top line number. But, then you get to the end of the year and while your top line mirrors your forecast, you can’t believe the remaining bottom line. Your operating costs didn’t increase significantly, so where did it all go? How can you have increased your top line so significantly while only making minor gains to the bottom figure?

What many owners and managers fail to realize is that not all customers are created equal. Some cost you more, making you work twice as hard for half the benefits. Case-in-point: the big box retailer. The visionaries and the innovators will soon lose out to the highly leveraged demands of these customers. Big boxes demand high volume at competitive prices and may eventually even knock off your design and create their own version under their own label. Now your customer is actually your competitor and you are forced to reduce your prices, and thus your margins, in an effort to compete with a similar product they are getting at a much cheaper price.

And what about the demands and lengthy terms they dictate their suppliers take? Plus, the high discounts and co-op dollars? Many will hit even you with chargebacks after the sale for any potential infraction during shipping or processing and spare you no leniency. Then there are the customers, while not big boxes, that demand significant amounts or your or your employees’ time. While, time is not a visible line item on your P&L, it costs you money nonetheless.

I have seen customers hit a client with so many chargebacks that it actually cost a client money to do business with them. Over $50,000 in sales equated to a loss of $600 at the end of the year. The chargebacks came for infractions and offenses so astounding to the mere mortals employed by my client that they could not be overcome no matter how much planning took place.

Giving a customer terms is essentially the same as lending your customers money, interest free, to conduct their operations. If you couple with a factory that is not lenient with payment options, it could leave you in a bind. The cost of any capital borrowed to continue your own operations then becomes a cost of doing business with this “partner.” If you are one of the lucky businesses that can afford to offer 30-, 60- or even lengthier terms without having to borrow, it often requires very strategic planning that could come undone with even one late payment.

Still, there are more costs to consider. What about those that, while indirectly associated with the sale of goods, can be directly attributed to a paticular customer. For example, fielding constant emails, trips by the salesman or owner to see the buyer, time spent making special rulers to ensure the shipping labels are never ¼” too far to the right, etc. These should be considered when you determine the true cost of doing business with a “partner.” Some customers require little in the way of discounts and chargebacks. They are willing to accept the prices you set, even if slightly higher than their competition. However, they email constantly or perhaps their lack of planning generally has your employees scrambling. Maybe then lose product and demand you ship it to them again or frequently ‘not receive’ their invoices and pay late. Time literally is money in these cases and it is costing you.

The purpose of this exercise is not to rid yourself of all customers, but rather encourage you to closely examine your numbers to determine if you are doing a lot of work for little-to-no reward. In some cases, such as the customer that cost my client money, the effort is not worth the sale. You are doing work without ever seeing a benefit. Why put in the extra hours and money to never see a nickel? If it is possible to do 1/3 of the work and still make the same amount of money, wouldn’t you want to?

You should know your profitability by customer and the actual effect these sales have on your bottom line. You don’t have to business with the boxes in today’s world in order to make money and have your products reach the masses. The internet has dramatically changed this part of the equation. The key may perhaps lie in your product mix as well. You may choose to limitedly offer certain products to the big guys in an effort to create brand awareness, but retain the sales of your more innovative products for independent dealers and your website. There are numerous variables to consider and you have to find the choice that is right for your company. But, whatever you do, don’t make the mistake of assuming all sales are created equal. The bottom line is that you may reap a greater end reward if you fire those who, when all costs are taken into consideration, actually cost you more than they are worth.

For further reading: See “The Distribution Trap” by Andrew R. Thomas and Timothy J. Wilkinson and “Angel Customers & Demon Customers” by Larry Selden