Theory?
Definition: “a theory is a group of linked ideas intended to explain observations. The explanations are based on assumptions.”
Theories can evolve to explain and predict events ever better or not. Exceptions to the theory (anomalies) should spark new – investigations, tools, metrics, conclusions – that either improve the existing theory or supplant it with a new one.
Example: The theories that – the Earth is flat and the center of the heavens – had good runs. But after – anomaly-led discoveries; burnt scientists; and 150 years – heliocentrism prevailed.
Question: What are your theories for how to achieve superior, sustainable, profitable growth?
Common Answers include a cluster of financial-management mantras and product-promotion beliefs.
Big Anomaly: the trend results from distributor financial surveys. 90% make pre-tax return on assets (ROTA) around 7%; while top 5% average around 22%. Do the stars have better success theories?
A Theory-Upgrade Experiment:
Think of your business as a pipe between suppliers and end-users. The pipe has activity-cost engines (people) that pull goods from suppliers into and through a warehouse. All processing costs turn big inbound shipments into – sold, taken, delivered and billed – small, assorted outbound orders. Orders are the economic unit of what distributors do. How many are profitable and unprofitable? They all add up to the year-end P&L.
To get an initial, rough measure of order and customer profitability do these simple steps:
1. Divide annual orders into annual: sales, margin-dollars, expenses and profits. One distributor got these averages:
| Sales per invoice: | $377.78 |
| GP$s/Inv: | $90.78 (24% of sales) |
| Expense/Inv: | $78.06 (20.7%) |
| Profit$s/Inv: | $12.70 (3.3%) |
2. Calculate for every customer, their average margin-dollars per order.
3. Rank them by GP$s/inv with additional columns for: total orders; and overall average margin percent.
Our case-study had a top customer that averaged $840 in GP$s/invoice on 551 invoices at an average margin percent of 27.5%.
A bottom customer: averaged $37/invoice on 2382 invoices at an average margin percent of 26.5%. Both customers are similar, commercial contractors.
4. Now brainstorm about – questions, theories, additional analytics and/or objections -that these results spark.
This experiment is a first step of a discovery journey towards inventing better: analytics; insights; theories; and game-winning plays.
But, Don’t Reinvent This Journey
Instead: check out my free, how-to, 12-recorded webinar series.
Webinar #3 is an introduction to Order-Size Economics and Profit Equation Management. #4-7 cover new plays. And, #s 8-10 cover how to rethink your field sales force. For a deck of all webinar slides to skim email me: bruce@merrifield.com.