Data from the past 15 years of trade association PAR reports show 90% of distributors have averaged poor pre-tax returns on total assets (ROTA). Furthermore, the same top 5% distributors average 3-4 times the returns of the bottom 90%.  Probably,  same channel, same commodities, just much better results. This is a Commodity-Hell Mindset.

But, the bottom 90% aren’t slackers. We can assume these participants are:

• Smart, conscientious, persistent and at least somewhat ambitious. Otherwise, why would they keep filling out the PAR surveys?
• Best Practice seekers (at least from a financial-management perspective)
• Members of the associations that sponsor the surveys, so presumably staying channel savvy
• Members of a buying group (if channel appropriate) to remain efficient

Breaking out of a Commodity-Hell Mindset

Conclusion? Being persistently financially efficient and keeping with the industry herd isn’t enough. Yet, what’s missing is innovative effectiveness. By breaking out of a Commodity-Hell Mindset you can actually innovate and effect. Effectiveness is doing the right things for your strategic context and doing them better. In a commodity-glut world, pushing products for price is a dead end. Based on analytical facts and customer survey information, I’ve achieved high returns and preached service value logic.

Who Buys Into Service Value Logic?  

My long-time followers know all about my data-based approach and:

• Using customer profitability analytics
• Varying service definition metrics by customer(s) or niche(s)
• Applying different service (cost) models for different size customers
• Creating a high-performance environment to engage employees to execute
• Executing team-selling of key accounts on total buying cost reductions

So, what are the alternative beliefs? Are their data-free mantras locking them into bottom 90% returns?

Stress Test Your Beliefs Against the Facts

So, there is a trend in the industry towards learning how to deal with our cognitive biases or predictable irrationalities. But, what good is another set of best practices within the strategic vacuum? Using data, you can stress test your beliefs against new facts about your core strategy.

Do you know these basic facts about your business?

• Who are your 5%-10% most net-profitable customers? The ones that you over-price, under-serve and could lose easily?
• Who are your biggest super-losing accounts, and the specific SKUs that they are buying too often in small-dollar amounts, boosting unnecessary activity costs for both parties?
• What is the most profitable niche of customers? And, their next-level service metrics?

In conclusion, it’s a long journey, but using customer profitability ranking reports built on and potentiated by line item profit equations puts you a few steps ahead of the competition.

Lastly, for help breaking out of a Commodity-Hell mindset and learning how to test your beliefs against the factual realities of this journey, contact me at bruce@merrifield.com about my live and online Line Item Profit Analytics (LIPA) Management 101 workshop.