Every distributor has one. The account everybody likes, that’s been on the books forever, that shows up near the top of the sales report every month. And somewhere in the building there’s a driver, a picker or a credit clerk who could tell you, if anyone asked, that this customer is a lot of work.
The sales report can’t see that. It sees revenue and it sees gross margin, and both of those are about what the customer pays you. Neither one is about what the customer costs you, and the gap between those two numbers is where a distributor’s real profit hides, or leaks.
This issue is the third step in something we’ve been building since Issue #4. That one gave you cost per stop. Issue #6 gave you the fuel gap per route. This one puts those next to the rest of what it costs to keep a customer, and ranks the list.
What gross margin leaves out
Take two accounts that each buy $8,000 a month from you at the same margin. On paper they’re twins.
The first one sends a purchase order through your portal once a week, twelve lines, one pallet, a dock with a forklift, and pays on day 28 by ACH. The second one calls three times a week, orders four or five lines each time, wants it tomorrow, has a receiver who’s at lunch when your truck gets there, returns something every month, and pays on day 55 after a statement and two phone calls.
Same revenue. Same margin. One of them is paying for the other, and the sales report will never tell you which.
The margin is what they pay you. The number is what they leave you.
The five places the cost hides
You don’t need an accounting project to see this. Cost to serve is five buckets, and you already have the data for each one somewhere.
- Taking the order. A portal order costs you almost nothing. A phone order costs a rep’s time, and a faxed or emailed order costs that plus somebody re-keying it and the errors that come with re-keying. Count orders by how they arrived.
- Picking it. The warehouse cost of an order is closer to the number of lines than the dollar value. Twenty lines of one each is more expensive to pick than one line of twenty, and a lot more expensive than it looks on the invoice. Count lines, and count split shipments.
- Delivering it. This is the cost per stop from Issue #4, and after Issue #6 you know the fuel on top of it. Count deliveries per month and, if you have it, time at the door.
- Taking it back. Returns, credits, shorts, and disputed invoices. Each one is a truck movement, a warehouse touch, and a piece of paper, and they cluster hard around a few accounts.
- Getting paid. Days to pay is a cost. So is every statement, reminder and phone call it takes to get there. Count days and count touches.
None of those are exotic. The reason nobody adds them up is that they live in four different places: the order system, the warehouse, the routing sheet, and receivables. Adding them up once a year takes an afternoon. Doing it every month is what separates the operators who set terms from the ones who accept them.
The play to run this week
Start with one year of history and a spreadsheet. You are not trying to be precise. You are trying to find the outliers, and outliers are not subtle.
- Pull the list. Every active customer, with twelve months of revenue, gross margin dollars, order count, line count, delivery count, credits issued, and average days to pay. Most of that is one report from the order system and one from receivables.
- Price the buckets. Put a cost on each unit. A rough one is fine: a per-order cost split by how the order arrived, a per-line pick cost, your cost per stop from the Issue #4 exercise, a flat cost per credit, and a small daily cost for every day past terms. Write the assumptions down so you can defend them.
- Do the arithmetic. For each customer, gross margin minus all five buckets. That’s what they leave you.
- Rank it. Sort by what they leave you, not by revenue. Then add one more column: what they leave you divided by what they buy. That’s the one that surprises people.
- Look at both ends. The bottom ten are the customers this issue is named after. The top ten are the ones nobody has visited in a year because they never cause a problem.
Expect three types at the bottom. The small, frequent account that orders like a household. The slow payer whose margin is fine until you count the sixty days. And the returner, whose credits eat the profit on everything else they buy. Each one has a different fix, and none of the fixes start with firing anyone.
What to actually do with the bottom of the list
The headline is a hook. In practice you fire very few customers, because most of the ones at the bottom aren’t bad customers. They’re customers on the wrong arrangement.
The small, frequent account gets a minimum order and a delivery day. Not a lecture, a schedule: we’re in your area Tuesdays and Thursdays, and the minimum for a delivered order is $300. Most of them consolidate the moment you ask, because nobody enjoys three deliveries a week either.
The phone orderer gets the portal, with a rep walking them through the first order. The slow payer gets a conversation about terms, and sometimes a small discount for paying by ACH on time, which is cheaper than the chasing. The returner gets a look at why: it’s usually one product, one picker, or one receiver, and it’s fixable.
And for the handful where none of that works, where the arrangement is the customer, you now have a number to make the decision with instead of a feeling. That’s the whole point of the exercise. It turns the argument in the Monday meeting into arithmetic.
The part that keeps it from going stale
The first pass is a spreadsheet. The problem is that customers change. The account that was fine last year picked up a new buyer who orders by phone, and the one you put on a delivery schedule quietly drifted back to three a week. A once-a-year ranking is out of date by the time you act on it.
The operators who get real value from this are the ones whose customer health lives on a screen someone looks at every week, next to the whitespace in each account, so the change shows up as it happens instead of at the next annual review. That’s what Workd Recon does inside the platform: customer health scores, churn signals and whitespace, running continuously off the same orders, deliveries and invoices you’d be pulling by hand.
Either way, run it once. An afternoon with one year of data will tell you more about where next year’s profit is than any sales report you’ve read, and it will almost certainly hand you a name you weren’t expecting.
Sources
- Fuel Behaved. Everything Else Didn’t. · Workd Weekly, Issue #4, the cost per stop exercise
- Fuel Behaved. Then It Didn’t. · Workd Weekly, Issue #6, the fuel gap per route
- Workd Recon · customer health scores, churn prediction and whitespace