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.

1. Profit is not a dirty word
Managing Profitability in Business Today

2. 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?

3. 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

4. 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%

5. 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!

6. 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!”

7. 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!

8. 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!

9. 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.

10. 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

11. 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.

12. 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

13. 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!

14. 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