Category Archives: Index

139. Better Mental-Models for Profit Power

Mental-Model Fuzziness?

We make decisions from a stew of emotions, beliefs, biases, and mental-model assumptions. Models approximate reality, so each has its blind-spots. But, a robust set of models can minimize oversights and help to make better business decisions.  

As a management team exercise, try writing down your models. Then, test them further with analytics, stakeholder surveys, and team discussions. Some common, flawed beliefs follow to get you going.         

Financial Model Beliefs 

  • Do you pursue greater sales to get economies for better buying and to spread fixed costs?
  • Do you grow sales by maximizing selling pitches to more customers to get more margin dollars? (And, why not sneak up prices too? Buy low, sell high!)   
  • To control costs, do you pay “fair” wages, run lean, and keep everyone busy? Then, won’t a bit more of each incremental, margin-dollar flow to the profit line?   

Financial discipline is good! But, the belief-questions above all have flaws and blind-spots. For example, does “make the numbers” work against investing in FedEx’s service-excellence model of: “People, Service, Profits”?

“Good Service” Beliefs

“Good service” is a commodity; it keeps you in the meet-the-price game. “Best service-value” – in the minds of targeted-customers – wins!  But, what are your assumptions for choosing initial segment(s) of customers to target? Can’t service-value metrics vary subtly and importantly for each customer niche?    

Target-Customer Beliefs

“Financial-Think” assumes bigger customers are better, and all are good. But, what if two customers are equal in both sales and margin dollars, but vary in average order size by 10X? Isn’t the small-order customer less profitable?

Cost-to-Serve analytics reveals that about 20% of big-margin-total accounts are typically net-profit losers.  They have too many small-dollar picks and/or orders that cause big, unnecessary activity costs for both parties. Win-win fixes are possible!  

People cannot process two orders at the same time. What is the opportunity cost of processing losing-orders from losing-customers? You can’t pursue, win, and process bigger orders from more net-profitable customers when consumed with losing Busy-Ness! So, what are your order-size-economic assumptions informed by Customer and SKU net-profit analytics?       

Innovation Beliefs/Conclusion   

Studies conclude that 60-80% of premium profits that star companies earn comes from innovations. Top 5% distributors grow faster and make 2-4X the ROI of the bottom 90% of distributors. The Stars are playing a better mental-model game! Why not upgrade your mental-models too?

For more mental-model testing, request my free: “Core Customer Renewal Roadmap” (bruce@merrifield.com). 

137. Amazon’s Channel-Model Innovation Challenge

LEVELS OF INNOVATION: INCREMENTAL, BUSINESS-MODEL, CHANNEL-MODEL

All businesses innovate. But, rearranging the deck furniture on the Titanic (an incremental innovation) is not as powerful as getting an iceberg-resistant ship or an ice-berg-free route.

Business-model innovation is when you rethink the system of how you organize your resources to create a breakthrough value for some target group of customers. You may also, simultaneously, eliminate wasteful or dying activities. Common phrasings: Weed to feed. Prune to grow. Downsize, Upgrade, Refocus and Revitalize. Do a “Blue Ocean Strategy”, etc.

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136. SELL WIN-WIN, LOWER PRICING (?)

PRICING EFFICIENCY ISN’T PRICING EFFECTIVENESS

Practice good-pricing hygiene. Don’t underprice SKUs or customers if they will continue to (happily) buy from you at higher prices. But, consider also the positive trade-off of lower prices in exchange for larger average order-size buying. What are your general buying and selling incentives for increasing order size?

CASE STUDY ON ORDER-SIZE ECONOMIES

For 2018, a $100MM contractor-supply distributor had roughly 4000 active accounts. More facts:   

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135. Fix Your CRaP Items and Their Root Causes

AMAZON’S WAR ON CRaP

Amazon’s analytics can identity SKUs on which they Can’t Realize a Profit” (CRaP). Even with their improving, world’s best fulfillment and last-mile delivery costs, they can’t cover costs on items lower than $15 per pick/order.

AMZ’s fixes to date?  

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134. The Small-Customer, Small-Order “Lollapalooza Effect”

Lollapalooza Effect: (A Charlie Munger term) When multiple cognitive biases reinforce one another within a group, irrational beliefs will take over.   

THE PROBLEM WITH SMALL CUSTOMERS WITH UNPROFITABLE, AVERAGE-ORDER SIZES

When distributors create a Cost-to-ServE (CTS) model to estimate and rank customers by net-profitability, there are typically two, customer-group shocks:

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133. Your Reply to the 2020 “Crisis of Capitalism”

FIRST-WORLD EMPLOYEES ARE RESTLESS

The “Yellow Vest” protests in Europe echo the “We are the 99%” (Occupy Wall Street movement) – back in August ’11. Both are symptoms of declining, discretionary income for the bottom 95%+ of households (in first world economies). Buying homes and having kids in the US is unaffordable for the average Millennial. And, if you have any promising, young employees, are they job shopping?   

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