If you have ever downloaded any tools or other resources on our site, you know that we usually ask you about your Biggest Business Challenge in our forms. In response to your feedback, we are featuring a blog series on your biggest business challenges! This post is a response to the challenge “achieving desired profitability."
Are you making more money as you grow your business?
Do you know what products, services, customers and markets are most profitable?
Are your margins growing or shrinking?
These are fundamental questions that a lot of companies do not have the answers to. Through my many years of consulting, I have asked these questions and helped quite a few companies figure out a better path to profitability. The answers are not always readily available, and it can take some time to gather and analyze the right data. Sometimes antiquated IT or accounting systems make it very difficult to sort through data and get to the right information. This is a topic that I could spend hours writing about, but let’s take a look at a few things you can do to get started.
We have all heard of the 80/20 rule where 20% of your products or customers make up 80% of your profits. The key is to do the hard work to figure out the 20% and increase this number. Here’s how.
Prepare a Customer Analysis.
Look to see if your revenue with each customer is growing or stagnant, what your margins are, and how difficult it is to service this customer. Try creating a histogram or waterfall graph that plots both revenue and margin by customer to paint a clear picture. Discuss each customer with your team to ensure you are taking in the whole picture. The best-case scenario is when you complete this analysis, you develop a profile for the ideal customer that appreciates your offering, is a delight to serve and meets your margin and growth requirements. You will also be able to identify the customers that have been bleeding you dry and absorbing margin from other more desirable customers. Concentrate on the customers that you can grow with and fire the ones that are draining your people and profits.
Prepare a Product Analysis.
The goal here is to learn what the margins are for each product; are they strong or declining? Have sales been increasing or declining on each product? Do these products fit the future of where we are trying to take the business? Look at the age of the product and the last time it was updated. You usually find that mature products experience declining margins to the point where it may be time to retire them or reimagine them. Graphing the age of the product line can be very interesting. It can also help you identify if you are putting enough effort and resources into new product development.
Prepare a Market Analysis.
Again prepare a histogram that shows customers by market, stacking revenue and margin on the same line for each customer. Look at revenue by market and margin by market versus market potential. This can provide insight into which markets to direct future efforts to, focusing on markets with growth and profitability potential. Develop a sales and marketing strategy to support these efforts.
Sell on value and differentiate your offerings.
Some companies price products and apply a standard gross margin to determine the cost. If the offering is different, you can price on value and what the market will pay.
This is only possible when you invest in product development and enhance your existing products so that they standout and are desirable to your customers. Budget time, money and resources to freshen up your offerings. Doing this avoids the trap of selling commodities. Apple is a prime example that demands 2-3 times what comparable products do. Differentiate your offerings to get the margins you need to increase profitability.
Audit your Systems.
Analyze your systems to ensure you have the capability to determine which customers, products and services are profitable. I have seen many companies out grow their existing accounting and ERP systems but wait too long to upgrade them. It is an expensive and time-consuming effort to do so, but totally necessary to get the right intelligence to run and grow the business.
One of the most important things in business is to know what products, services and customers are profitable and kill those that are not.
Good luck and increase those margins, Alan