Think you have control over profitability? Here’s how high profit companies are controlling profit drivers to maximize results. See how your business stacks up.
- Measuring individual customer profitability. One-third of all customers in wholesale distribution are money losers when factoring cost to serve. Manufacturing companies suffer as well. Small orders, small accounts and high maintenance drain margins. Take the time to measure profitability with invoice data and cost data to set minimum margin thresholds. Target accounts below the minimum for improvement or jettison entirely for immediate profit gain.
- Isolate and measure price performance. Price has more impact on profitability than any other driver. Monitor price on a monthly basis and see which accounts, items, and product families are impacting profits. Remember, a 1% improvement in price boosts earnings for the average company by 11%. Ignoring this metric can account for 20% to 30% of profitability.
- Know where you are losing sales. Sales churn happens in every business. Know which accounts are no longer buying and which ones are buying less. Sure, you can make up the loss with new business but it’s harder to get new business than keep existing business. Give your sales team visibility to accounts that are slipping.
- Measure mix. An accurate explanation of profitability isn’t complete without a measurement of mix. Mix can be isolated from volume, cost and price and accurately measured to give a full explanation of profit. Don’t assume that margin variance from month to month is caused by mix alone. High profit companies know how and where mix is impacting their business.
- Know where your business is under-priced. Businesses with lots of items and customers are prone to missing the mark on price quotes. Smaller orders and smaller accounts typically don’t get the attention necessary when it comes to pricing. But, these typically add up to two points in margin opportunity or more. Use invoice data and basic price analytics to get visibility to under-priced transactions.
- Measuring freight recovery. Most managers believe there is little gain in freight recovery. We find that even though freight policies are in place, deviation occurs more frequently. You won’t know how much this is costing until you measure it. If you have the data to compare freight costs to freight revenue on a sales order basis, you can identify where loss is occurring. We often find that certain sales reps may offer free freight more than their peers.
Using your available data to measure these profit levers becomes the underlying foundation to control. And, a scalable analytics tool (not Excel) that is shared across the organization helps to create a profit oriented culture. Management can adequately explain margin variance, product managers can address pricing opportunities and sales can improve customer profitability.
To learn more about tools to control profitability, contact me directly at firstname.lastname@example.org or call me at 330-958-4036.