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?
“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?
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” (firstname.lastname@example.org).