The Value of Major Accounts Measure profitability to manage them more effectively
SELLING POWER EDITORS
If your company has very large ac- counts, you almost certainly devote special efforts to them. Whether you call them “key accounts,” “national accounts,” or “strategic accounts” doesn’t much matter: How you man- age these accounts does matter. Effective management starts with measurement. To know what you are managing, you must measure not revenue, but value. Some large customers are both demanding and unprofitable. They want higher service levels and they make frequent special requests. Ev- ery year, some big accounts conduct hardball negotiations to force price cuts. These are the sorts of custom- ers your competitors deserve to steal right out from under you. True strategic account management re- quires quantifying the value of each relationship in hard dollars. While managers may have a dif- ficult time saying no to any major accounts, they still understand the profitability of their products. Yet few adequately measure the profit- ability of customer relationships. Sales executives may suspect some large accounts are not profit- able, but they know these accounts generate major revenue. And ex- ecutives are often compensated on short-term revenue.
THE 5-150 RULE
What about the 80-20 rule? Sure, 80 percent of your revenue may come from 20 percent of your customers, but where are your profits coming from? In the late 1980s, Sweden’s Kan- thal Corporation discovered a new rule. Call it the 5-150 rule. Kanthal is a major producer of temperature control components and systems. When it took a hard look at its ac-
counts, Kanthal found that only 40 percent of its Swedish customers were profitable. These customers generated 250 percent of profits. Remarkably, the most profitable 5 percent of Kanthal’s customers gen- erated 150 percent of the company’s profits!
In other words, a small minority of Kanthal’s customers was compensat- ing for huge losses on most other accounts. At the bottom end, just 10 percent of Kanthal’s customers were responsible for losses that cut the company’s profits by more than half. Most surprising, two of these biggest losers were among Kan- thal’s top three accounts in revenue generation. What’s a manager to do? Swed- ish industry is heavily taxed, heavily regulated, and heavily unionized. You may be saying, “It can’t hap- pen here.” But it does. Despite the general rage to quantify everything, few American businesses can tell you the true profitability of their most critical strategic relationships. One study found that two-thirds of Fortune 500 companies did mea- sure the value of customer relation- ships. But the study said the most common measure of value, even among giant and sophisticated firms, was revenue or usage rather than profits. Manufacturers can roll up gross
profit margins on the products they sell. They have a much harder time identifying non-product costs attrib- utable to individual customers. Some companies have found they have demanding customers who do not provide significant profit value. To a CFO, these relationships have negative equity. And a CFO likes zero a lot more than a minus sign. CFOs, with their eyes on share-
holder value, will force attention to profits. Top sales and market- ing executives, who must allocate funds to customer relationships, will require far more thorough justifica- tions for these relationships. Market leaders are moving toward true-value measurement in their strategic account programs. The broad steps are simple: 1. Develop a model or logical picture of everything you should be counting as a gain or a cost in the profitability of each customer.
2. Identify the factors that drive your firm’s costs even as they add value for your customers.
3. Estimate the net present value of strategic relationships, just as you would a physical asset.
4. Finally, and the point of it all: Manage your strategic relation- ships as assets.
Many firms still spend significantly
more time and expense maintaining their physical assets than on man- aging their relationship assets. But the best relationship assets can be worth many times the value of physi- cal assets. Isn’t that worth a little maintenance effort? But getting started requires more than a little effort. The first step: How do you model profitability? How do you get accountants and sales managers to agree on how to measure all costs, probable revenue, and net value of an account? It re- quires shifts in thinking and an end to adversarial relationships within the company.
Firms that now measure customer value say the effort was well worth it and don’t even mind that competitors have snagged some of those leftover demanding and unprofitable accounts.
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