Profit is not a dirty word
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Profit is not a dirty word

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In business today, companies are ceding profitability to their customers. Their focus is in other areas and they are not concentrating on their bottom line. Realigning company goals around overall ...

In business today, companies are ceding profitability to their customers. Their focus is in other areas and they are not concentrating on their bottom line. Realigning company goals around overall profitability as opposed to individual goals will result in significant improvements to the bottom line and the long term health of the business.

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Profit is not a dirty word Profit is not a dirty word Presentation Transcript

  • Profit is not a dirty word Managing Profitability in Business Today
  • Profitability is the easiest formula in all of business: Revenue – Expenses = Profitability If this is so easy, why are companies unprofitable or less profitable than they should be? How can they put more money to their bottom line?
  • The Blame Game Finance – “Sales gives away the product” Sales – “Operations is not efficient enough and cannot serve our customers” Operations – “We need to invest in capital and technology to keep us ahead” Marketing – Not our fault – the value prop is there! At the end of the day everyone is throwing darts and no one is hitting the mark - Profitability
  • Pareto’s Profitability Inevitability Pareto’s 80/20 rule exists in all aspects of business including profitability where 20% of your customers are profitable and 80% either break even or are unprofitable. What does that mean? Depending on who you listen to your Top 20% are generating between 120% and 220% of your profits! The Bottom 80% are generating a loss of between 120% and 220%
  • This is not my company! Actually some form of Profitability Pareto is occurring: 20/80 may not be the actual number but rest assured it is between 10/90 and 35/65. It has been cited in multiple books and white papers including: Dr. Jonathan Byrnes is a Senior Lecturer at MIT and owner of Jonathan Byrnes & Co – a business consulting company specializing in Channel Management and Profitability. Dr. Reed Holden is owner of Holden Advisors and considered a pioneer in the field of Pricing and Strategic Price Management. White Papers including Epstein’s Customer Profitability Analysis, Storbacka’s Customer Profitability: Analysis and Design Issues and Cooper,/Kaplan’s Profit Priorities from Activity-Based Costing Acorn Consulting even has a calculator on their website to determine how much you are leaving on the table!
  • How does this happen? Companies are unwilling to address unprofitability as it will disrupt the applecart! Profitability begets profit apathy. Companies that are profitable are generally content and do not engage in disruptive behaviors. Keep the customer happy! Identifying unprofitable customers would encourage action which may upset the customer. Fear of the unknown. Companies do not know where to start so they stay the course. Just to mention a couple of reasons “How do you like them apples!”
  • OK – you’ve convinced me to identify and fire my unprofitable customers, right? NO! Remember that 80% of your business is not profitable made up of 30% to 40% of that is Unprofitable AND 40% - 50% that Break Even Focus on incremental improvements – what would it take to get a 1% improvement across 80% of your business? Why stop there, try for a 2% or even a 3% improvement and watch profitability grow!
  • OK – so what’s next; what do the experts say? The $64k question! Dr. Holden claims that it is a pricing issue and starts with large customers who are unprofitable due to high discounts and low gross margins. Dr. Byrnes claims it is a cost to serve distribution and channel issue and that small customers are unprofitable due to less consistent ordering patterns and smaller orders that use more resources and result in low operating margins. Both lay out very convincing arguments and a step by step process of how to address it that could be construed as contradictory to each other!
  • It is not an “either or” but a “both and” Addressing the 80% will require fixing both the revenue and the expense side of the equation Operations: KPIs based on efficiencies Sales: Comp and metrics based on revenue and volume Marketing: Metrics around lead generation and net return of promotions and offers Finance: Tracking net profitability of company overall Business operate in silos with their own KPIs and metrics In many cases compensation in the form of bonuses are based on how well the managers perform against their metric or KPI goals. The goals can and in many times do conflict across business functions. Individual business disciplines can achieve their goals but because they are not synchronized and profit based, business will fail to maximize profits.
  • Break down the silos! Create Metrics and KPIs that are based on profitability and span across disciplines! Get your individual teams working as one team with one goal – higher profits. Marketing: Focus on value creation Sales: Comp based on margin or net price Higher Profits Operations: Understanding Cost to Serve each customer Finance: Profitability at customer level
  • Answers are hiding in plain sight – your Data Silos exist in the data world as well that cannot be broken down. Build bridges to mine data across functions that tie to customer profitability. RFP Data Discount Data Competitive Data Segment Data Payroll Data P & L Data Receivables Data Finance: GL Data Industry Data Pricing: Customer Data Market Data Asset Allocation Employee Productivity Utilization Data E-Mail Data Segmentation Transactional Data Web Data Direct Mail Data Operations: Product Data Sales: Marketing: Do not be intimidated by the scope of the data. Look for clues where data correlates across business functions.
  • Overcome Inertia – If you are standing still, you are moving backwards! Start small Pick one customer to analyze Don’t strive for perfection; 80% – 85% accuracy is OK Look at data from across all silos What is the true profitability of the customer. Now what action can you take to increase it? What can you institutionalize Rinse and repeat
  • Managing Profitability is not easy It will take putting together a cross functional team that is willing to: forgo egos for the good of the company step outside their comfort zone not be afraid to be disruptive challenge and be challenged be creative and look at all solutions champion change The results will be worth the efforts!
  • Questions on how to better manage profitability please contact: Jim Broderick Website: www.pricingpyramid.com Email: jim@pricingpyramid.com LinkedIn: www.linkedin.com/in/jimbroderick1 Twitter: @Jim_Ppyramid Phone: 508.361.8047