Strategic Insights 16

DOMINATE CORE-CUSTOMER, PROFIT POOLS[1]

Do you think your company is better than your bottom line suggests? Your right, because you intuitively know that:

1.     Hiding within your financial numbers, there are very profitable customers and products that pay for the unprofitable customers and items.

2.     The profitable customers and items are inter-twined; they make each other possible.

3.     The cash-flow from this “pool” of customers and items is big. It covers all of the losers with a bit left over for financial profits.

4.     Your share of the possible net-profits from your core pool of customers is un-measured, un-managed and far short of what it could be.   

5.    While financial GAAP reporting is necessary, it biases everyone to pursue sales volume whether the gains are: profitable or not and to core pools or not.

6.    If profits are weak and economic headwinds are unrelenting, trying harder isn’t going to help?

Is there a different perspective and path to greater profitable growth? YES!

HOW TO CAPTURE MAXIMUM SHARE OF YOUR CORE PROFIT POOLS

A “profit pool” for a distributor is the total potential of the intersection of your most profitable customers (within a specific customer niche) buying your most profitable items. Your best customer niches will emerge by assigning each of your top 20+ most profitable customers into “what-do-they-do” descriptive categories. You are looking for customers who buy a common array of items and enveloping services. Each niche can also be sub-divided into size levels that receive different bundles of services, prices and terms.  The lower boundary for outside sales coverage –for example- is around $4800 in margin per year. [2]

For each niche, run a most-popular-&-net-profitable, item ranking report.[3] Determine approximately what the one-stop assortment of stocking SKUs is for the niche to then:  

a.     Tune fill-rates for the most popular/profitable items higher

b.     Identify most unprofitable items and invent alternate ways to sell them to reduce hidden costs for both seller and buyer.

c.     Create a report for each customer of the best items not being bought to pursue.  

Although one-stop-shop fill-rates are the foundational element of a distributor’s “service value equation”, what are the rest of the equation’s metrics? Interviews with 3 or more of the best, most progressive and friendly customers within a niche will help to refine the service equation.

After defining the equation, determine internal service metrics that all employees can improve. For the best customers in a target niche also:

1.     Provide a perfect service guarantee.

2.     Provide a hot line to a service manager for special (emergency) service needs.

3.     Do a management-led, buy-sell process improvement audit followed by a recommendation report and installment services for free or some subsidized rate.[4]

4.     Ask about all of the common items the customer is not buying. Better service from fewer, consolidated suppliers lowers a customer’s “total buying costs” and improves their “up-time economics”.     

5.     Insure that all employees know top accounts by heart and are able to say “yes” to whatever unusual service needs may arise.

After reinventing service value for the 3-5 best, friendliest, core-pool customers, roll out the new service value proposition to the rest of the pool.

WHAT ARE THE POTENTIAL UPSIDE RESULTS?

A distributor can typically: double existing sales and quadruple net-profits within the niche. And, much greater sales will turn a bigger, fill-rate-service, inventory investment much better than that of unfocused competitors can do. The improved inventory economics will be an invisible, service-value barrier that allows on-going niche domination. Shoot for 50-80% of the total, net-profits from the pool.

WHY HAVEN’T MORE DISTRIBUTORS SWITCHED TO BEST-PROFIT-POOL MANAGEMENT?

From ’48 to ’07, we grew up prospering in a country and industry where everyone used financial-management marketing principles by default.  Who knew much about hidden net-profit cross-subsidies? Why not stick with what has worked and we know well? We have been distracted by pursuing volume with too many product promotions, from too many suppliers, to too many different types and sizes of customers with one standard service model.

A global debt-bubble extended our prosperity from ’82 to ’07. It’s over; we have to change. Volume is vanity, profit is sanity and free-cash-flow, profit pools are heaven.  Technology now allows distributors - who understand “profit-pool management” - to subscribe quickly and affordably to a net-profit-management, turnkey, web-service system.   

How easy, affordable and profitable is it to pursue this new paradigm path? Find out by requesting a management team, go-to-meeting demo of Waypoint Analytics' net-profit-management, web service. Contact me for details.   

 

Bruce Merrifield