Real-world customer profitability management

"Real World"

Management profitability Comments

Gordon Koury

Foris Consulting

"We have seen our volumes up 15% over last year, we have more customers than ever. Do not understand why our net income has not increased"

– Anonymous wholesaler sales VP

Ok, so not a lot of us have seen their sales increase in the last year or two, but it raises a big question. We control our costs, try to grow sales, too often do not receive bottom-line results we expected. Kaplan and Narayanan Harvard Business School, argue in their paper custom white profitability and management of many companies, the most profitable 20% of customers to produce more than 200% of net revenue, with 80% remaining and the benefits smaller customers.

Profitability Management customers is a concept that can help this. Start with a financial model that can tell the profitability of existing customers or new business. The model should use Activity-Based Costing (ABC) grants and have both the total cost and variable cost estimates, and allows you to explore options to improve profitability. I must say net profit and return on investment (ROI) in percent for a client, taking into account both fixed and variable costs. Must have the ability to allow the allocation cost to be easily modified to take into account the specific needs of customers and the economy only. Discouraged if you do not have the internal capacity to develop the financial model. There are many people who can do it for you. Easy to use There are also some models that have been refined in use for several years are available. My Profit Master ™ tool is one of those.

Once the model, the first work hard, you need to know what to do with this information and to implement a continuous improvement process. What do existing customers who appear to be profitable? What is the return must be new customers? Who is responsible for all this?

Fortunately, the implementation of this process can be done in several stages.

What is important recognize that new customers are the lifeblood of any business, so start by using the model to evaluate new opportunities. In the evaluation of new business and / or new customers who want to make sure that sales of new additional generation net revenues and cost of capital. The new opportunities, especially larger ones, are often competitive price. It is important to set a minimum performance hurdle for new firms to ensure that any possible cover all the cost variables and makes contributions to fixed costs.

Customers who have more credit risk or non-strategic for your business (do not fall into one of its main target markets) should have more obstacles. This helps keep companies growing financial strength corresponding their basic skills. As managers use the model on new cases, they will understand the factors (I call "levers of benefits") that can improve profitability of the company for wholesalers, it is the margin, size of the order, payment patterns, days of inventory, lines per order, and others.

Once you have a little experience to evaluate the profitability of new businesses, it is time to deal with existing customers. You need to stratify clients in a of the four categories according to their potential sales volume and profitability today. Each of these layers have different strategies that are appropriate. The graph above illustrates this concept and the strategies that are appropriate.

Its obvious starting point of this process is its largest customer, which in one quadrant of the right. Because they are large, can devote time and energy for some of them and have a significant impact. A great way to start is to evaluate the top 5 scores each territory sales representative, and propose a plan of action on one or two of your accounts. Plan of action may be to increase the total volume of neglect add business the vessel in order to improve size, etc. Some very large, competitive prices to customers can require special efforts to reduce the cost of acceptable performance investment. In some cases, you can choose a customer leaving particularly difficult and unprofitable to free up resources for more promising opportunities.

The days agenda is to identify customers in the lower left quadrant (Lower King, low potential). There will be many of these accounts. You want to automate this process by discharges of a discharge of all accounts of the ABC model, only the type of low profitability, low-volume accounts above. These are not usually "home" accounts, as most of the wholesalers have implemented price and size standards for these customers (even if a company with whom I worked have recently to a minimum so low that there were hundreds of customers who averaged less than $ 30 gross profit at last!) In general, customers have a representative Sales to ask, but I have strict rules and prices order size. What to do with this group of accounts depends on the volume and open business practices. You does not want a big "fire" customers who seem unnecessary, since it is very likely that the treasures hidden in this group (which is actually belong to quadrant King of inferior high potential). I recommend quick action on a limited number of the worst of these bills (order size and price guidelines) and a strategy deliberate for the remainder of the growing volume and improve profitability. Although it is tempting to try to fight against reunification at a time, my experience was that many small movements are more effective than a single set.

Finally, spend some time evaluating the customers in the upper quadrant of the High return investment, low volume. There are probably many of these customers by the number. Look for natural customer segments and examine how to attract more profitable customers in these segments and extend the capabilities of the product. Once again, it will be hidden treasures of this group who have significant potential additional volume if they are targeted.

Before you know it, you'll have a continuous process of evaluation and continuous improvement of customer profitability. There are several important tools you can use conjunction with this process, these include:

• "Notice business" with the main (current or potential), low profit accounts – Want details of all the great things he has done for them and ask for more volume and opportunities. It is to be successful if done professionally. His organization model should be quite ready PowerPoint presentation to load the data for those customers.
• Prices "Levante" Tools – These are programs that make sophisticated evaluations in the price / volume of reports from all your customers find where individual customers price is less than other customers with volumes similar. Recommend changes in prices for specific customers on specific products. This is not a panacea, but many companies out there that offer this service, some no cost to you in advance. Work with the following rising prices of products offered by Horizon ™ Zyman Group, and performed dozens of times with excellent results.
• Sales Training – Your sales force may not have the sophistication or the skills to close more opportunities or to negotiate better terms with customers. May be primarily "price" or "relationship" sellers. If you can train yourself to seek solutions to customers and provide the basic skills and engage in batting practice "to ensure you really develop new skills, you can get in front of more opportunities.

The combination of the assessment tool of profitability, a means of obtaining new business in the door, and an ongoing process to see profitability less profitable customers to help ensure your business is a success in sales growth and continuous improvement. I have a couple of cautionary notes about the process, however. First, I encourage that to avoid a qualitative "labeling of customers (for example, unprofitable customers are" bad "). From my point of view, all I want to give my company business is "good", so I prefer quantitative accounts labels such as "low return on investment." Second Instead, make sure you are smart about the decisions that could lead to volume is important to understand what the real impact of the changes will be more volume. You can not reduce its return order. Third, I advise you to avoid the temptation of trying to make a profit-making. You have some strata client where you may want to do all operations costs, but it must be strategic about where to focus on the profitability of the order and where to focus on the profitability of the relationship. Finally, take several small steps rather than giant. It is too easy to see the initiative not because it is too Gigante overwhelming for a workforce which is already more than enough to do so.

Gordon Koury is a partner with Foris Consulting. He spent 20 years in the field of wholesale distribution in various roles, including information technology, the Division of Management, strategic planning, operations, finance, recovery, start-ups and acquisitions or mergers. He has been professor of finance and strategy of formal management development. It has a and a master's degree in Business Administration. His work has been published in industry magazines, publications management and response in the Program Distance Learning, "sponsored by Accenture Supply Chain Academy. He can be contacted at www.forisconsult.com.

About the Author

Gordon Koury is a Partner with Foris Consulting. He has spent 20 years in the wholesale distribution business in diverse roles including information technology, division management, strategic planning, operations, finance, turnarounds, business startups, and acquisitions/mergers. He has taught Finance & Strategy in formal management development programs. He has Bachelor’s and Master’s Degrees in Business Administration. His work has been published in industry magazines, turnaround management publications and numerous webinars. He can be contacted at www.forisconsult.com.

The Casewise Online Visual Process Models for ITIL

Aube by Honeywell TI070-3W/U ECONO Switch Programmable Timer Switch, White $42.99 Offering easy installation and flexible seven-day programming, the Aube by Honeywell TI070-3W ECONOSWITCH Seven-Day Solar Programmable Wall Switch helps save money by ensuring that your lights come on only when you need them. This unit works with incandescent, halogen, and fluorescent lighting, making it ideal for indoor or outdoor use.TI070-3W ECONOSWITCHSeven-Day Solar Programmable Wall SwitchA…

Omron HJ-720ITC Pocket Pedometer with Advanced Omron Health Management Software …

Pioneer AVIC-F700BT In-Dash Navigation Audio Receiver with CD Playback and Advanced Voice Controls $699.99 The Pioneer AVIC-F700BT car stereo combines a multitude of functional entertainment capabilities with advanced navigation features that fit and expand the lifestyle of today’s driver. The highly sophisticated in-dash navigation systems enable users to link and control their personal devices through optional accessories. Apple iPod connectivity, Bluetooth, MSN Direct, HD radio, XM and SIRIUS Satell…

Pioneer AVIC-F900BT In-Dash Navigation Audio/Video Receiver with DVD Playback and Advance Voice Controls $1,200.00 Amazon.com Product Description You’ve been holding out for something that links all of your devices together into one seamless experience. You love the idea of a system that can be operated by the sound of your voice. It’s time to stop wishing for the next great thing because it’s here. This is your life made easier. Introducing the Pioneer AVIC-F900BT In-Dash Navigation AV Receiver with DVD Playb…