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:

  • Some big-margin-dollar customers are big losers. Their many small-dollar orders and/or line-item picks total eat more CTS dollars (CTS$s) than their Gross Profit dollars (GP$s).
  • And, 40 to 80% of all customers are small with small, average-order sizes. Their CTS$S also exceed their GP$s.  

Warning! You can rapidly increase Small-Losers with a web-site marketing effort that wins new customers with terms that don’t insure enough GP$s per order.   

Case example: a big distribution chain got these web-selling results: popped company sales by 8%; while customer and transaction counts doubled! So, 80% of all customers generated only 5% of the GP$s on 25% of all transactions. The new CTS-model verdicts:

  • The Web Division was a net-loser
  • Traditional distributor fulfillment costs exceed Amazon’s.   

THE LOLLAPALOOZA DENIAL REACTION  

The model stinks! Change it to turn little losers into winners. But, if 100% of operational costs are in the CTS model, then costs shift to turn other accounts into losers.

So, kill the CTS model and return to the traditional, data-free, Lollapalooza Belief-Bundle that includes:  

  1. All sales and margin dollars are equally good (irrespective of related CTS)
  2. All costs are fixed in the moment, we can always take one more order (or thousands) without hiring any more CTS fulfillment people or reinventing CTS like Amazon.      
  3. All new sales/margin dollars grow: economies of scale; profits; and rebates!
  4. Reps don’t like to see commissionable accounts as net-profit losers. Pretend they aren’t; be happy!  
  5. Win more customers (of any size, kind) to replace defections and deaths to support 1-4.
  6. Little losers will grow into big profitable accounts.
  7. Little losers have higher average GP% which makes them (more) profitable.
  8. Everyone we listen to in the industry shares these beliefs (confirmation bias?). Stick with the herd!
  9. And, we’re doing OK financially. More volume will win.   

OR?

Discuss belief blind-spots. Test them against statistical analytics. The opportunity costs of being distracted by burgeoning, Small-Order Busy-ness? Could you grow faster and more profitably by super-focusing on and better partnering the biggest, profitable, growing accounts? Using what buying statistics to spot lose-lose activity costs to fix?    

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