Want your sales people to be more profitable? Want your company to make more money? It’s time to fire the Buyer!
The difference between a customer (whom you should court) and the buyer (whom you should fire) is profitability. Customers help you make money — buyers use more resources than they pay for. The key is knowing which is which — a customer or a buyer?
Look, most businesses try to run their organization by the “numbers.” They get a financial statement and agonize over the detail and still can’t take the right corrective actions to increase profits. I am suggesting that the answer is not on the financials — the answer is in what we call “Transaction Analysis.” Not exactly the T.A. of behavioral science (an oxymoron if ever there was one.) What we’re saying is that the overhead costs of a company are driven more by human transactions than the dollar volume of sales.
Borrowing a little from T.A. we analyze the rituals of doing business based upon human transactions. A simple example of a human transaction audit: a customer calls in an order and it is received by a customer service clerk — one transaction. the clerk enters the order into the computer and a picking order goes to the warehouse where a picker/packer pulls the item off the shelf for delivery — second transaction. The delivery driver loads the item and takes it to the customer — third transaction. We now have half a sale — the item was ordered and delivered in three transactions.
The delivery slip is returned and given to an accounting clerk to enter into the computer as fulfilled and billable — a fourth transaction; an invoice is created and mailed — a fifth transaction. At the end of the month a statement is prepared and sent to the customer — a sixth transaction. A check is received and logged into the computer and the money put into the bank — two more transactions to complete one sale!
To get one simple sale the company goes through eight transactions. But what happens when the part ordered is wrong? A call comes in to the customer service clerk and a pickup slip is generated — another transaction. And on, and on, and on — each transaction adding costs of doing business.
When you understand the transaction rituals of your business, you can place a value on them. If a company generates 1,000 invoices, and each invoice has a minimum of eight transactions in its normal ritual, it will take 8,000 transactions if everything goes perfectly. Add to that the additional transactions required by special ordering non-stock items, processing returns, warranty, etc.
Suppose we add them all together for a month and come up with 12,000 transactions to make 1,000 sales. We can divide the overhead by 12,000 and get a per transaction cost of doing business with the present rituals. If you have a $50,000 monthly overhead, that comes to just over $4 per human transaction.
For example’s sake, suppose we come up with a $4 cost per human transaction. A simple order will cost 8 transactions at $4 each, or a $32 burden on each invoice produced. We also know that there is an additional 12 transactions required to return a piece of merchandise and reenter it into the system — another $48 cost for each return.
We also know that there is an 8 transaction cost of inter-branch transfers or buyouts — extra transactions for producing a purchase order, making a phone call, etc. — another $32. If you add the transaction cost of accounting and record keeping, the transaction costs spiral up.
Back to the “buyer.” When I analyze my client’s customers buying patterns and find a customer making a large number of small invoice purchases that do not cover the transactional costs — or making excessive returns — or only ordering hard to get items that must be ordered out or trans-shipped, I’ve located the buyer that is not paying for the services supplied.
A customer will usually fit this pattern if my client’s company is not their first supplier of choice. That means that they come to my client when their first choice is out of stock or doesn’t carry or have access to the hard to get item. The competitor is getting the simple, easy to process bulk orders while my client gets the small purchase with high transaction costs.
First choice for corrective action? If the buyer has a significant lifetime value, we get with the buyer and try for a bigger share of the business so as to cover the transactional costs. If that’s not possible, we fire them! You will be surprised at how many of them will agree to give you more business, or pay you more for the single item purchases, restocking charges, buy-out surcharges, etc. rather than lose a good secondary supplier. The key has always been to identify the abusers.