Harvard Business Review: Managing Customers for Profit and Not Sales
101
Manage customers for profits not just sales)
Benson P. Shapiro, VKastuh Rangan, Rowland T. Moharty, and Elliot B. Ross
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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
Manage customers for profits not just sales)
Benson P. Shapiro, VKastuh Rangan, Rowland T. Moharty, and Elliot B. Ross
(rl3
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