If the bulk of your firm’s sales come from selling price-sensitive, commodity products, then is your differentiator: “service value”? If so, do you let the customer define what “distinctively, rewardingly valuable service” is? Wouldn’t the “service value equation” (metrics) vary – starting with different arrays of one-stop-shop SKUs – for each customer-niche you target? And, what are the customer size boundaries for a given “Cost-to-Serve (CTS), Selling/Service Model”?
If you measure service generically for all customers, don’t you risk having “good” service for most niches and “rewardingly best” for none? Many customers will then use “price” as a tie-breaker between two or more “good” service-and-people suppliers. They aren’t pure-price buyers. They may use prices from poor-service firms to pressure the good ones. Without a best-total-value proposition, they want:
- To avoid poor-service costs that exceed price savings from weakest suppliers;
- To keep the few best suppliers hungry and quoting to the bottom; and,
- To get “good service” AND measurable price savings.
THE SOLUTION FOR PROFITLESS VOLUME: NICHONOMICS
How do you, niche-by-niche, achieve Best Service Value (BSV) performed at the Lowest, Cost-To-Serve (LCTS) to enjoy Highest Profit Before Interest & Taxes (HPBIT) on a sustainable basis? Is the “value equation”, BSV – LCTS = HPBIT, possible? Yes, through focus, fit and share of customer niche. In sport, decathletes lose to event specialists. In free markets, customers within a niche (event) will reward the best-value supplier (specialist) with 50-80% of the profit pool or “gold”. #2 will get 20%+ (or “silver”) and the rest get breakeven or losses. Niche-focused service achieves:
- Highest service value
- Bigger, retained share of all customers within a niche.
- Lowest-focused-efficient-cost structure; and,
- Inventory economies-of-scale within the niche.
- Faster sales growth that is all very profitable as a by-product.
CUSTOMER NICHONOMICS QUESTIONS TO PONDER
- As you proceed down a given distribution center’s customer-net-profitability ranking report, what appears to be the branch’s, historic, #1, most “net-profitable” niche of customers?1
- For any prospective niche, the top 2+ most profitable customers represent how many more, similar customers down the ranking report or under-sold in the marketplace?
- How do you define the boundaries for what customers are in or out of a specific niche using discriminators like: industry segment; selling service-model cost; annual margin-dollar potential range; common items bought; and buying philosophies/objectives?
- If you ranked all of the items that a niche-group of active customers bought, how many items were bought by 2 or more of these customers? Are these most popular items, net-profitable or net-unprofitable?
- How can you tune fill-rates higher on the profitable items?
- What will higher fill-rates do for:
- The niche customer’s average, order-size and service satisfaction? (up)
- Back-order frequency and costs? (down)
- Substitution sales that mislead item-demand forecasting? (down)
- Inter-branch split shipments and costs? (down)
- Personnel productivity? (up)
- Local sales service pride and confidence? (up)
- And, incremental margin dollar flow through to the bottom line? (way up)
- Who is in charge of measuring and managing the fill-rate economics in #6 above? What type of analytic-tracking-report capability do they have? What type of net-profit development incentive at both the SKU and supply-line level?
- What are the popular, net-profit losing items? What few customers are buying them constantly with whom you could co-create a win-win, “precision supply chain solution”?
- Aside from fill-rates, what are the other “service value metrics” that you can co-determine by interviewing a few, key, representative customers within each target niche?
- How do we measure and improve these metrics internally to a distinctively, best-value level?
- Can you learn and then sell/teach customers how our service value equation:
- Lowers the 11 elements of their “total procurement cost”?
- Improves the “uptime” of the people who must use our products on a timely basis?
- Improves their customers’ satisfaction-retention-referral economics?
- How stunningly profitable and unprofitable are the niche’s customers at the extremes of the net-profit ranking report?
- If your total team did a few extra things for the 5 most – profitable, unprofitable and potential upside – customers, what is the net-profit-improvement upside potential?
- Large, progressive customers are trending towards buying commodities at a “lower, total, supply-chain cost”. Are you creating and selling the “service value-chain solutions” that they are looking for?
- Could customer-niche-centric action – double your sales and quadruple your profits – within your best, historic, niches?
- What are your dated financial, product pushing assumptions that keep the team from seeing and thinking about customer-niche, service value economics?
- How can you convert these questions into actionable plans?
Easy! Contact me and/or attend the Advanced Profit Management Conference in Phoenix.
Bruce Merrifield firstname.lastname@example.org
All previous Strategic Insights are posted at www.merrifield.com/Insights.
- “Line-item profit analytics” (LIPA) will solve all net-profit and net-profit improvement references in this “Insight”. For more on LIPA see Insight #17) ↩