Shocking Profit – Part 2 of 5 - You’re Making Money in One Part of Your Business and Quietly Giving It Back in Another
By Tim Van Mieghem| Founding Partner | Author of Shocking Profit
TL;DR: Most companies lavish A-level service, capacity, and terms on B and C customers and products that don’t earn it, and the income statement never shows the bleed. Segmenting your business with the 9-Box reveals exactly where you’re giving margin back: the small customers you over-serve, the capacity you burn on low-return work, and the products you’ve costed all wrong. Fixing it is pure EBITDA, no new capital required.
Look at the wall in your lobby. The plaques, the framed logos, the marquee accounts you’re proud to have landed. Now let me ask you something uncomfortable. Are you sure the biggest logo on that wall is actually one of your best customers?
In three decades of walking factory floors, I’ll tell you what I keep finding. The biggest name on the wall is very often a B or even a C customer wearing an A customer’s jacket. Huge revenue. Thin margin. Endless demands on your people, your plant, and your cash. You landed them with a champagne toast, and they’ve been quietly costing you ever since. Nobody on your team decided to lose money on that account. It just happened, one accommodation at a time, and the blended income statement has been politely hiding it from you.
Meet the twins
Let me reintroduce two characters from the first article, because this is where they really come to life. Picture your business as a set of twins. We’ll call them Della and Tess.
Della is the high-volume twin. Her demand is steady and predictable, her products are well priced, she turns her inventory fast, and she practically runs herself. Tess is the other twin. Her demand is lumpy and hard to predict, her orders are small and custom, her products are underpriced, and she needs constant attention. Same parents, same roof, same income statement. Completely different children.
Here’s the thing I want you to hold onto for the whole series: Tess is not the problem child. There is nothing wrong with Tess. The problem is that you’ve been raising her exactly like Della, with the same pricing, the same service promises, the same scheduling, the same everything. And what works beautifully for Della is quietly bleeding you through Tess. The fix was never to love Tess less. It’s to stop pretending the twins are the same girl.
Giving profit back shows up in four faces. Let’s walk through each one.
1. Are you treating B and C customers like A’s?
Start with the most common giveaway of all. You have A customers, B customers, and C customers, your largest, your middle, your smallest, ranked by what they actually buy. And almost every company I walk into is treating some of its B and C customers exactly like A’s. Same rush turnarounds. Same custom runs. Same generous payment terms. Same drop-everything responsiveness. You are spending A-level effort and A-level cash to serve accounts that pay you like a C.
I’ll make this concrete with a company I’ll call Uniform Advantage, a custom apparel maker we worked with. Strong brand, healthy margins on the surface. When we ran their business through the 9-Box and lined up their products against their customer size, the large-customer corner looked great, solid operating margins, the heart of the company. But out in the small-customer end of the long tail, once we loaded in the real cost to serve those accounts, the rush orders, the tiny custom runs, the hand-holding, that corner was running at a negative operating margin. They were paying for the privilege of those sales, and they had no idea.
70%+ gross margin, negative operating margin
Uniform Advantage’s small-customer corner of the long tail, once real cost to serve was loaded in
That is Tess, being raised like Della. The small accounts were getting the same white-glove treatment as the big ones, and the white glove costs the same whether the order is large or small.
Where in your business are you giving A-level service to C-level accounts?
When you answer that honestly, you’ve found money.
2. Are you spending your best capacity on your worst-paying work?
Here’s the second face, and it’s the one the income statement is worst at showing you. It isn’t only about margin on paper. It’s about capacity.
Every hour your plant runs is an hour you can never get back. Every machine hour, every labor hour, every foot of floor space is finite. So every time you say yes to a low-margin order, you are spending a slice of that finite capacity, capacity you could have spent on a high-margin one. You’re not just earning a little less on that job. You are crowding out the better work that capacity could have done instead. Economists call it opportunity cost. I call it the most expensive thing on your shop floor that never shows up on a single report.
This is why a company can be “busy” and “growing” and still feel stretched thin and starved for cash. The plant is full, all right. It’s full of Tess’s lumpy, low-margin, hard-to-schedule work, while Della’s profitable orders wait in line behind it.
Busy is not the same as profitable. A full plant can be a warning sign, not a victory.
3. Are you using today’s capacity to build things you won’t need for months?
The third face is sneakier still, and it’s a cousin of the second. Sometimes you spend today’s capacity making product you won’t sell for months.
I worked with a consumer products manufacturer whose production runs were designed to make eight to twelve weeks of supply of any given item at a time. It felt efficient. Long runs, fewer changeovers, everybody busy. But step back and look at what was really happening. They were creating a feast-or-famine cycle: they’d overproduce one item into a mountain of inventory while customers waited on a different item still stuck in the queue. They were using this week’s capacity, and this week’s cash, to build for a sale three months out, while a sale they could have shipped and billed today sat behind it.
That’s capacity spent early, converted into cash you can’t touch, and parked on a shelf as inventory. When we helped them shift toward smaller, more frequent runs matched to actual demand, capacity for their key product jumped meaningfully, with fewer people and one less line. They didn’t buy a thing. They just stopped spending Della’s capacity to build Tess’s future inventory. We’ll go deep on this, and on when to make-to-order versus make-to-stock, in the articles ahead.
4. Do you treat every product the same when they’re nothing alike?
The fourth face moves from customers to products, and it’s where your own numbers may be lying to you.
Sometimes we treat all our products the same when they could not be more different. One product ships in a single heavy bag on a pallet. Another needs eight package sizes, custom labor, and bright retail printing. If your cost accounting spreads overhead evenly across both, smearing the same burden rate over the simple product and the complicated one, then your margins are fiction. You are almost certainly pricing the complicated product too low and the simple one too high, and steering your salespeople toward exactly the wrong work.
I saw this play out with a CEO I’ll call Mila, who ran an ice melter business. Her financials told her the “boring” ice melter line was the low-margin afterthought and her more complex product line was the moneymaker. Six weeks of segmentation showed her she had it exactly backwards. The boring bag-on-a-pallet product was printing money. The “profitable” complex line was barely paying for itself, because all the costs of that complexity, the extra handling, the small batches, the packaging, had been smeared evenly across both instead of landing where they belonged.
Your cost assumptions are either roughly right or precisely wrong, and often they’re precisely wrong.
So what do you actually do about it?
Here’s the part that matters, because finding the giveaway is only worth something if you act on it. And notice: almost none of the fixes are “fire the customer” or even “raise the price.”
When the grid shows you a B or C customer getting A-level treatment, you have a menu. You can adjust the service policy, standard lead times instead of rush, minimum order sizes, less hand-holding. You can change the terms. You can shift them to a different channel. You can, yes, adjust the price. Pricing is one lever, and it’s the subject of the next article, but it’s only one. The deeper move is to stop promising Tess the same things you promise Della, and to match each twin’s treatment to what that twin actually is.
When the grid shows you capacity bleeding into low-return work or building ahead, the fix is usually in how you schedule and how you decide to make things, block-scheduling the predictable base and reserving flexible capacity for the lumpy work, or flipping the right products from make-to-stock to make-to-order so you stop guessing. Those are the heart of articles four and five.
And here’s the part I never let a client skip. When the numbers come back ugly, do not turn them into a weapon. The shipping supervisor who’s been giving rush service to small accounts isn’t the villain, he’s been protecting your customers from a system nobody fixed. The salesperson who priced the custom job too low was using the only cost numbers he had, and those numbers lied to him.
Truth is not a stone meant to hurl at people.
Use what the grid shows you to fix the system, not to assign blame, or your team will quietly stop showing you the truth and you’ll be right back in the dark.
Why this is the fastest money in your business
Step back and look at what we just covered. Over-served small customers. Capacity burned on low-margin work. Capacity spent building ahead. Products costed backwards. Not one of those fixes requires new equipment, new headcount, or new capital. The value is already sitting inside your business. You’re just finally seeing it.
That’s why this is the first and biggest thing segmentation reveals. And it’s why, when a private equity firm buys a company, this is often the very first analysis they run, because they know the giveaway is there, they know it’s sizable, and they know every dollar they recover gets multiplied by the exit multiple. You can recover it now, while it still belongs to you.
The giveaway in your business is real, and right now it isn’t a decision anyone is making on purpose. The grid makes it a decision. Della and Tess deserve to be raised as the different children they are. Do that, and both of them will finally thrive.
Frequently Asked Questions
- How do I know if I’m giving profit back to certain customers?
Start by ranking your customers from largest to smallest by what they buy, then look hard at the small ones. Ask whether they’re getting the same rush service, custom runs, generous terms, and responsiveness as your biggest accounts. If a small, low-margin customer is consuming A-level effort, you’re likely subsidizing them. The clearest tell is cost to serve: when you account for the real cost of rush orders, small batches, returns, and hand-holding, many small accounts that look profitable on gross margin turn out to lose money. The pattern hides because it’s spread across hundreds of transactions and buried under a healthy average. - What is the cost to serve and why does it matter?
Cost to serve is everything it costs to do business with a customer beyond the cost of the product itself: rush orders, small-batch production, custom specifications, special packaging, returns, hand-holding, and extended payment terms. It matters because two customers can buy the same product at the same gross margin while one costs you far more to serve. When cost to serve is ignored or spread evenly across accounts, your most demanding, lowest-paying customers look more profitable than they are. Capturing it is often pure EBITDA, because you’re fixing how you serve an account, not spending new money. - Why does treating all SKUs the same hurt profitability?
Because your products are not the same, and spreading overhead evenly across them buries the truth. A simple product that ships in one bag on a pallet and a complex one needing custom labor and multiple package sizes do not cost the same to make, store, and handle. If your cost accounting smears the same burden rate over both, the complex product looks more profitable than it is and the simple one looks worse, so you underprice complexity and may even push your salespeople toward your least profitable work. Segmenting products by their real cost reveals which ones actually earn their keep. - Isn’t a full, busy plant a good thing?
Not necessarily. Busy and profitable are different things. Your capacity, machine hours, labor hours, floor space, is finite, so every low-margin or build-ahead order you run consumes capacity that a higher-return order could have used. A plant can be completely full and still be starving you of cash and crowding out your best work. The question isn’t whether the plant is busy. It’s whether the work filling it is the most profitable work available to you. A full plant carrying the wrong mix is a warning sign, not a victory. - What should I do about an unprofitable customer or product?
Rarely should you simply fire them, and rarely is a price increase the only move. You have a menu: adjust service policies (standard lead times instead of rush, minimum order quantities), change payment terms, shift the account to a different channel, change how you schedule the work, flip a product from make-to-stock to make-to-order, or adjust price. The right move depends on what the segment actually is. The goal is to stop applying your high-touch, high-cost playbook to accounts and products that don’t warrant it, so you keep the relationship while ending the giveaway.
Della and Tess deserve better
Come back to the twins. Della, steady and predictable. Tess, lumpy and demanding. For years you’ve raised them as a single child, one pricing scheme, one service promise, one production schedule, one set of terms. And it’s quietly cost you, because what fits Della starves you through Tess.
None of this is Tess’s fault. She was never the problem. The problem was managing two different businesses as if they were one.
So which of your customers and products are you treating like A’s when they’re really not?
Go find out. Then raise each twin as the child she actually is. That’s where the profit, and the pride, has been waiting all along.
If you’d like to see what this looks like inside your own operation, that’s what we do at The ProAction Group. The consultation isn’t free, but the conversation is, and we can tell you whether segmentation can help your business and how. Call us at (312) 726-6111.
For the longer playbook behind the 9-Box and the other value levers, the book is Shocking Profit, available at shockingprofit.com.