GROW PROFITS NOT NECESSARILY VOLUME
BC until the last half of the 1970's, if a firm sold more volume, they almost
always grew profits too. Now volume growth is just as likely to reduce
profits, which raises some questions:
did the volume rule work for so long and why did it stop working?
then does “profit power” really come from?
are the steps that we must take to achieve sustainable profit growth?
answer to the first question is easier than the other two. For the first 10,000
years of civilization, the supply of all products was chronically less than
a growing primary demand. This basic condition, which still exists in
Communist and Third world Countries, permitted a set of secondary conditions:
power in the channels of distribution used to be the greatest with the
producers of raw materials and the least with the final consumer. Manufacturers
sought to secure their own raw material sources, and they appointed exclusive
distributors because they didn't have enough capacity to sell more. Because of
chronic tightness of supply, wholesale distributors (WDs) sold much of their
volume at “book price” until the early 70's. And end‑users were loyal
repeat customers to insure future allocations of product from the authorized
firms were far more “product‑driven” than they were "customer‑needs
driven” , because getting more product to sell was the problem.
quality” was enough to get by, because the customer was delighted to get the
primary demand booming, especially in the US since WWII, growth was assured, so
everyone focused on controlling costs. Volume grew as fast as sales people and
outlets could be added. With more volume at book price and costs under control,
profits could grow as fast as volume.
the underlying condition of supply and demand for the industrialized free world
has changed in the last 15 years. Population growth has slowed to 1% in the US and below zero in Japan and Europe; basic needs have been heavily
saturated; while supply of everything has continued to grow. Today there is
a glut of most every product along with great excess capacity for distribution
and retailing. What worked for 10,000 years, must be changed. Some new
guidelines that now apply are:
Become more customer‑needs focused. Define who is your primary
segment of customer by at least the three dimensions listed below, and then
restructure your marketing and service capability accordingly.
INDUSTRY TYPE (x) SIZE (x) SELLING
MODE (x) BUYER MENTALITY
1. A Outside
sales Carriage Trade
2. B Telemarketing Value Buyers
3. C Direct
4. D Cash‑n‑Carry PURE PRICE
This model suggests that for any
target industry there are 12 potential marketing sub-segments (4 sizes
(x) 3 mentalities). Each one may require a different mix of items for their one‑stop‑shop
needs; a different mode of selling; and a different set of services. If a
firm sells them all the same, then that firm is vulnerable to:
standard services and prices to small order, small accounts at a loss.
time trying to sell pure‑price buyers costly service value which is bundled
into the price.
stripped of service value by the aggressive value buyer who provides last look
at a lower price from an unacceptable‑service supplier to get the service
and the price.
having the resources to provide extra services or strokes to the “A” and
“Carriage Trade” accounts, because they have been wasted on the first three
e. Losing business to competitors who
focus more exactly on some of the sub-segments. Wholesale clubs, super‑stores,
and catalog/telemarketing distributors have taken market share, for example,
from the full‑service distributor and retailer channel.
to measure, however crudely, all accounts by estimated profit contribution, and
rank them from most profitable to least. Most firms who do this find initially
that the best 20‑40% of their accounts contribute 120‑150% of
the profits to offset losing accounts.
of today's increasing competition, there is consolidation occurring in most
industries and start-up companies are not as likely to survive or to grow to
significant size. Firms should, therefore, reallocate energy from
prospecting for new accounts with more salespeople to retaining and
further penetrating the largest, most profitable accounts with consultative
salespeople. Measure retention and penetration rates for core accounts.
identifying most profitable core accounts, work hard on “perfect,
distinctive service” in the customer's mind. This requires you to: define
it; measure it; achieve and sustain it; sell and get paid for it. Because most
competitors now have access to flawless quality commodities in excess supply,
the service value that is added by your firm is the only edge.
quantitative and financial management goals to qualitative goals. For too
long, US managers have tried to: sell high; buy low; hire them cheap and work
them hard; turn inventory; and collect early and pay late. These are simplistic
Article 1.2 continued
a. Sell better by getting paid for
zero‑error, lower‑cost, higher‑value service. Focus on margin
dollars minus transaction cost instead of margin percent which is misleading; a
big percent on a small order is a loser.
b. Buy better from those suppliers
that offer the “lowest total procurement.” If their prices are higher, then their
service quality reduces other costs even further. If their “earn” is less, then
their better total service value increases "turns" even more, so that
the “turn x earn” is still higher.
c. If you want to achieve perfect
service, than you must hire “achievers” at higher wages, not lower.
Achievers can save on hidden costs: they work harder, smarter and better, so
you need fewer of them; you can strip out the costs of inspectors, supervisors,
and mistake‑curing. Pay a lot and expect even more; for 120‑150%
of the going wage you can achieve 165‑200% of the average output per
employee. There is no other way.
d. Higher inventory turns is desirable
only after you have measured and achieved higher fill rates than your
biggest head‑to‑head competitor. Having one‑stop‑shop
in stock is the keystone for good
a firm tried to pursue some or all of the recommendations above, they might
well have to reweave the entire fabric of their business ‑ a tough
challenge. Before starting transformations, it is best optimize all aspects
of an existing business first. Don't carry or continue to grow
inefficiencies when starting on a risky adventure.
a firm has been volume and product‑driven and currently has mediocre to
fading profits, then there are usually “downsizing, upgrading” opportunities
with the customer portfolio, inventory cash-traps, and employees. If a firm can
correctly identify the winners and feed them while shaping‑up or out the
definite losers, then:
1. Profits can double or triple;
2. Fire‑fighting significantly
3. Morale, confidence and pro-activity
are the pre‑requisites for: moving a company to and along a more focused
and appropriate strategic course; and building sustainable organizational
strength and profit‑power. The weaker parts of some plants must be
pruned so that limited resources can flow to the promising parts and allow them
ÓMerrifield Consulting Group, Inc.,