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Firing your customers Featured

9:38am EDT July 22, 2002

The opportunity to supply major components for a 52-story high-rise in the middle of Manhattan seems like the kind of project that most companies might jump at the chance to snag.

That's not necessarily so, as far as Sandy Ussia and Laura Huch are concerned. The sisters, owners of Cranberry Township-based Castcon-Stone Inc., a $3 million revenue fabricator of precast concrete stairs and architectural products, have discovered that basing their business relationships on anything but predictable profitability is worth avoiding.

Castcon-Stone is doing work for the aforementioned New York City project, but Huch, Castcon-Stone's president, emphasizes that she had to first be assured that her company could do the job on its own terms.

"They would have very much liked to have done it on their terms," says Huch of the client.

What allows Castcon-Stone to wield such clout? Huch acknowledges that a surging economy has produced strong demand for its products, keeping the business growing at a brisk clip. But a more deeply held principle is involved as well.

"Even if we weren't busy, it would still be my position," says Huch.

Huch and Ussia have learned that having a lot of customers, even a lot who place big orders, isn't necessarily a sure path to solid profitability. For Castcon-Stone, that has meant taking a hard and comprehensive look at the company's costs -- and its customers.

While Huch and Ussia assumed ownership of Castcon-Stone just this year from their father, both have worked in the 46-year-old business for more than a decade. About five years ago, they got the feeling that something wasn't quite right with the company's growth efforts. They were working hard and doing business, but their profits weren't reflecting their efforts.

"I was having a lot of problems with our profit margins fluctuating so much," says Huch.

The partners decided they needed to analyze two general aspects of their business -- their product offerings and their customer roster -- and how the two combine to produce profits.

They realized it would be no easy task. The variables proved complex and sometimes difficult to quantify. They knew that the cost of projects didn't just involve time and materials, but other factors as well, including the terms and conditions of payment and the level of hand-holding they might have to do with a client to complete a project.

And they suspected that some of their long-time customers would be among the poor performers.

They also knew that some of their products weren't bringing enough profit. They sensed that if they were selling low-profit products to customers who were stretching out payment schedules, their margins likely would shrink even further.

Ussia, who joined the company in 1990 after spending several years teaching college-level computer and accounting classes, had upgraded the company's information systems, giving Castcon-Stone a good handle on its costs. That allowed them to figure out what their profit is on each type of product and to have detailed records of all the projects they had performed the previous five years.

They also looked at how terms and conditions of payment affected their profitability with each customer.

Says Huch: "Certain customers, no matter what we were selling them, weren't profitable."

In some cases, the payment terms they had arranged required Castcon-Stone to draw on its line of credit or dip into cash reserves, something that increased its costs.

After they crunched the numbers, they concluded that about 15 percent of their customers were producing little profit for the company because they weren't purchasing profitable products or they operated under terms that cut into Castcon-Stone's margins. In some cases, it was both. The answer, they decided, was to increase prices on their low-profit products and adjust the terms and conditions of their contracts.

The number crunching was relatively easy. Huch and Ussia say they realized they would have to approach customers with some adjustments in pricing and terms. For some, it was a case of "sticker shock." Some accepted the new arrangements, others objected. In the end, they lost about half of the bottom 15 percent as customers.

Bracing for the change

As Huch and Ussia learned, making changes in the fundamental ways you do business isn't always easy. Customers are going to resist change, especially if it might cost them more.

"Certainly, you're going to have long-term customers saying, 'What's going on here?'" says Huch.

Even so, having hard data and a solid rationale makes it easier for customers to accept.

She also points out that the changes can alter the way you look at your company. Cutting back on some lines of business and increasing others can have dramatic internal effects, the sisters acknowledge.

The process, which Huch says needs to be ongoing, has yielded positive results. While some customers went elsewhere, the company made up for the losses by focusing sales and marketing efforts on more profitable customers and products. Sales last year increased 25 percent, and are expected to increase by the same amount this year. Even more important, profitability is up -- a fact that makes the effort worth it.

Says Ussia, "It's not a good feeling to have busted your butt for a whole year and only made 1 percent." How to reach: Castcon-Stone, (724) 776-1777

Ray Marano (rmarano@sbnnet.com) is associate editor of SBN magazine.