The economic and financial conditions behind the global, economic slump of Q4 ’08 promise a tough 2009 for most businesses. What else should we do besides the standard downsizing moves that parallel declines in our average sales and margin dollars? How do we carefully: either sculpt away our corporate bloat (losing: customers, products, people); or, redeploy losing-activity resources into revitalizing the ripped, profitable athlete that is hiding within the general average numbers?
DE-AVERAGE OUR FINANCIAL NUMBERS
Our financial numbers are average totals that comply with accounting rules to pay prompt, accurate taxes and borrow against current assets; they have nothing to do with delivering best, total service-value metrics to best accounts within best-for-us, customer niches. What if we “de-averaged” our numbers to find that the conclusions of many “cost-to-serve-customer” studies apply to our business too: somewhere between 20 to 40% of our customers are generating 150% or so of our profits to offset the losses that we get by over-serving and under-charging 50% or more of our customers.
With deeper analysis into this area, we will find active accounts that do not have the average-order-size-volume needed to generate enough margin dollars to cover the total transaction costs of traditional wholesale services. They should go to a cash-n-carry “wholetail” store like Granger or Fastenal that has a business model for making a profit from such customers and orders. Have distributors been historically so product and sales growth oriented that many are guilty of selling too many products and services to too many different types of customer niches with one common service value equation? How should we rank all of our niches by estimated profitability, than what?
THE HOW-TO RECIPE FOR CUSTOMER NICHE IDENTIFICATION
Here’s a customer-niche identification and measurement exercise for distributors:
- (In a sales meeting) code every active account (above some worthwhile activity level, if not all) by the following dimensions:
- Traditional customer segment that everyone in the industry uses: industrial, contractor, dealer, etc.
- The size or strata of the customer within the segment with volume boundaries determined by the most effective and affordable business-model way of selling them starring the “selling mode”:
- Full-service with outside sales rep assignment (“A” strata)
- What is the minimum monthly margin dollar activity level and average order size that will support this model?
- This strata can be further split into finer levels for super-big accounts; what, for example, is the boundary between “AAA” and “AAAA” accounts and what extras do 4A’s get that 3A’s don’t?
- “B” strata or “wholetail”: these accounts are in between traditional, full-service activity and public/consumer retail activity. Many of these customers buy in regular, but small quantities and really want wholesale services, they just don’t want to pay for them and won’t if a distributor chooses to serve them at a cost that exceeds the margin dollars.
- “C” strata or retail or web-store accounts. These are small order customers that buy occasionally and randomly
- Full-service with outside sales rep assignment (“A” strata)
- What is the customer’s purchasing value mindset:
- Buy from my best friend(s) even if their prices and service are a bit non-competitive: relationship buyer.
- Buy the best total procurement cost, service value (however they define it), because consolidating paperwork costs and maximizing uptime are valued. (“Aggressive” value buyers pretend to be “price buyers” in order to get good service and low prices.)
- Price buyer that bids out most everything and cherry picks the best prices. These accounts are genuinely pennywise and pound-foolish, although many learn from “bargain price, bargain service” experiences to become value buyers.
- What is the customer’s growth rate compared to their industry average:
- Star (5): perpetual innovator, growing 2-4 x industry rate; only 5%
- Above average (4): hard-working imitators of innovators (10%)
- Average (3): 70% of all customers; just reactively surviving
- Dying slowly (2): being harvested; 10% of the group
- Dying quickly (1): crisis mode; 5% – perhaps higher in 2009
RUN AN ARRAY OF CUSTOMER PROFITABILITY RANKING REPORTS
Customer profitability ranking reports are the doorway to understanding the true sources of most companies significantly, cross-subsidized profits and losses. Many new insights and tactical plays emerge from such analysis.
Ranking reports to run include:
- Ranking all of a profit center’s active accounts on one master report. Include cumulative-ranking columns to see what percent of the customers account for what percent of the profits at interesting levels, because many employees will take many educational repetitions before they start to believe the results. Typical results are: top 10% of customers => 95% profits; top 20% => 120%; and the bottom 1% => destroy (20%) profits.
- Do similar sub-ranking reports for:
- Each sales territory. Rank the reps by how much profit they are generating for the company. Note that the reps with the highest margin percent averages generally have the least profitable territories, because the small, average margin dollars in their orders don’t cover the transaction costs.
- Rank all of the segment-strata niches by total profits generated. What are the companies two best? Why? What are the company’s worst niches? Why? What other competitor(s) is serving the worst niches better with a different business model? Guestimate what share of each niche’s total potential profit pool we currently enjoy? A goal should be to have at least 50% of the profit pool of any given target niche. Why? How?
- The other niche dimensions – why customers buy; and how fast they are growing or dying – will help to determine if current marginal or losing accounts are worth transforming into profitable accounts or sending them a letter dictating new terms that will make them either profitable or leave. Could the defectors go to new, wholetail, spin-out business that you open or to a re-seller partner of ours that has a business model that can make money on a cash-n-carry basis?
WHAT PROFIT-POWER PLAYS EMERGE?
From these reports, it will be quite evident that we should:
- Identify the super-loser accounts that are in are best segment-strata niches and try to convert them from “lead accounts into golden ones”. (For deep, how-to’s for many of these “plays” read the 31-page report at this link: merrifield.com, Exhibit 44.)
- Sign-up 2-5 of our most profitable, progressive and open-to-us customers in our #1 niche to be advisers for re-inventing our “service value equation” for that niche (lots more to this play).
- Identify 5 best, upside-growth and growing customers within our #1 niche to team-sell in order to crack and partner them so they can grow us.
- Rank the most popular items bought by all of the customers within a target niche to:
- Beef up the fill-rates on the best items (google: “fill-rate economics”).
- Create lists of most popular items that each niche customer is not buying from us and try to win that incremental business.
- Identify all of the marginal and losing accounts that:
- don’t fit our business model;
- aren’t within a niche that we can be competitive with except to get occasional small, money-losing, fill-in orders; and
- are shrinking into bigger losers and indirectly invite them to go elsewhere so that we can either layoff more expense dollars than lost margin dollars( by about a 2:1 ratio) or redeploy some of that activity energy into growing our best accounts.
- Downsize, upgrade, refocus, reinvent and re-pay our sales force? Most distributors who have gone to market with outside sales reps since “the beginning” now have too many reps calling on too many B and C accounts. By putting the very best reps on only A accounts and laying off the least effective reps, a lot of good economic things will happen. When we put our best people on the best target accounts within a niche for which we have the best total service value offering, sales will typically go up more than 20% for the niche within six months! And, with the new, only-A-account territories, there is enough margin dollars to maintain and capture that the company can go to a new compensation plan base on “delta profit” increases rather than some percentage of sales or margin which pays commissions on losing accounts and turns reps against the profit improvement plays.
WHERE TO GET THE ANALYTICAL AND MANAGEMENT INFORMATION?
The keys to “de-averaging” a firm’s current financial reporting capability is to obtain the right strategic business intelligence capability that already has:
- Wholesale diagnostic templates and plays built into it.
- Offers educational video and consulting support to help all key employees to see the business in new ways and believe that the “revolutionary” plays above can yield revolutionary results for all stakeholders.
- To buy these services on a fast (up in one week!), flexible (monthly payments), as-needed basis (stop the service when you want) through a browser.
There is only one solution provider within the wholesale-distribution industry that I know of that can provide all of these benefits: Waypoint Analytics. If you would like to attend one of Waypoints all-day seminars to benchmark your existing Business Intelligence capability against Waypoints to decide whether you would like to knock off all of these capabilities in-house or rent the service for whatever time is needed, please contact me.
©Merrifield Consulting Group, Inc., Article 2.30