Article 2.29
Marketing Plan 2009: Sell More Old Products to Core Customers
2009 will
be a tough-economy year in which real interest rates (the difference between
the nominal interest rate and the deflation in inventory values) will be high
(if bank debt remains available for leveraged distributors):
·
What items should we proactively
sell to which sub-sets of our customers to maximize profits and free cash flow?
·
How
should we engage our suppliers on strategically profitable growth opportunities
instead of their less-focused agenda of selling all of their products to any
of our theoretical customers?
·
What
are our economic assumptions for the four marketing plays below?
ROI’s FOR DIFFERENT,
MARKETING PLAY OPTIONS?:
If we had
four separate profit centers that each (hypothetically) pursued – with equal
execution capability – one of the four different marketing “plays” below, could
ROI outcomes vary as follows?
1.
Sell
more stocked items to existing customers that buy those items, but not from us.. .
Sell….more old items to old customers
ROI 15x
2.
Sell….
more, new items to old customers ROI 5x
3.
Sell….
more old items to new customers ROI 2x
4.
Sell….
more new items to new customers ROI 1x
What
underlying economics would make #1 be so much more lucrative?
·
Little
to no incremental costs for: buying (new) items; stocking (new) inventory
investment; product education; or extra sales calls in the field.
·
Decent
margins and service fill-rates on items that are already being bought well on a
steady replenishment flow from existing (best) suppliers.
·
Credibility
with our customers for being a viable source for the new, old items
·
Meeting
a general, customer-need trend for reducing total procurement costs on
commodity replenishment by consolidating out miscellaneous suppliers to fewer,
major suppliers.
·
High,
incremental-margin-dollar, flow-through to the PBIT line (profit before interest
& taxes). If the existing margin dollars in an average-sized order for a target
customer already exceeds the average cost of the transaction (it’s profitable!)
then flow-through rate for incremental margin dollars from more line items per
order is about 50%!
The ROIs
for the other plays drop way off, because they are missing some or all of the
economic advantages of play #1. A big assumption for plays 3 and 4 are that:
the up-front cost of cracking a new, worthwhile account on a profitable basis
is greater than the cost of stocking and selling new items to old buddies.
So, why
don’t we first, systematically, sell to exhaustion all of our “old-2-old”
oversights opportunities before we pursue other plays? How measurably big (or
not) is this potential sales opportunity anyway?
GENERATING THE
“OLD-2-OLD” PROSPECT AND TRACKING REPORTS:
To execute
the “old-2-old” play more effectively than in the past, imagine having a strategic
intelligence reporting capability that would allow us to:
·
Identify
a list of all profitable customers
within each niche of customers that we pursue, starting with our strongest,
most profitable niche first. (Why?*)
·
Do
a popularity ranking report of all stock keeping units (SKUs) that 2 or more
customers within the target niche have bought from us in the past 12 months. Other
columns in this report would include, for each SKU:
- Number/percent
of customers that had bought it;
- # of total picks by all customers
(the sorting factor in descending order);
- $s of
total sales from all customers;
- Average
$s bought by each subscribing customer;
- Total
margin $s per SKU;
- Total
estimated PBIT $s earned per item;
- Average
inventory $s currently invested in the item;
- Cumulative invested inventory $s for our entire,
one-stop-shop offering from most highly picked to whatever lowest-picked-level SKU
we wanted.
·
Then,
do split-out reports for each sales territory listing the target-niche accounts
within the territory with all of the popular items that the account WAS NOT
buying along with estimated consumption totals by account and by territory. (We
might assume simplistically that each account might buy on average the “average”
amount of that item that all other niche accounts had bought.)
Finally, run monthly
reports, thereafter, to see how much old-2-old sales success each rep. was having.
OTHER OLD-2-OLD PROGRAM ENHANCEMENTS
We could help
the old-2-old selling effort by:
·
Selectively
beefing up some of our most popular items for better fill-rate effectiveness.
·
Isolating
sub-lists of items from preferred suppliers to engage their marketing
cooperation for getting higher niche penetration for their items/line.
·
Identifying
some items from redundant suppliers that we would like to close out and sub in
items from a preferred supplier.
·
Paying
extra, team-focus efforts on selling: a) most popular/profitable items; b) to
our most profitable customers; c) that have a growing future; d) along with
improving the customers’ internal replenishment systems.
·
Deciding
how to proceed/negotiate with those niche customers that are heretofore unprofitable
or marginal in volume and profitability.
·
Pitching
our customers on the importance of consolidating out miscellaneous trade-credit
suppliers by switching both more old items to us and perhaps some new ones
(play #2) that we might add (probably from master wholesalers) to round out our
one-stop-shop assortment of items for the target niche.
·
Help
our customers, who are motivated, to improve their replenishment systems
practices to achieve – fewer, larger average orders; lower total inventory
investment; and yet higher on premise, uptime availability of products. This
would improve our order size and incremental margin dollar flow-through to the
PBIT line.
CRITICAL MASS: INVENTORY AND SALES BARRIERS & PROFITS
All of
these measures would help us to better define and tune a customer-niche-focused,
“critical-mass, inventory investment” of now-known, measured breadth and
depth-investment of SKUs. If we achieve a dominant share of the customer-niche’s
profitable, sales volume, then we can better-turn the biggest, best-fill-rate
inventory investment in our competitive geography at a much higher ROI than
competitors. If competitors should tire of losing customers that switch to our
better fill-rate service value, they could then try to match our inventory
investment. But, saying “Me too” without an additional switching-value
proposition on top won’t win back share. They would then find that their investment
would:
·
Turn
too slowly for lack of enough sales;
·
Generate
too many, small, fill-in, money-losing orders that would not have our flow-through
margin dollar economics; and,
·
Distract
them from dominating their own best, historical niche(s) from which they are
currently (unknowingly?) making 150% of their profits to cross-subsidize their
below critical mass adventures.
Dominant-share
of customer-niche sales volume and best, one-stop-shop, fill-rate-service
inventory investment are two, inter-related barriers to competitive entry and
sources of sustainable, profit power.
JUST ONE PROBLEM: HOW
DO WE GET THE OLD-2-OLD REPORTS?
For
old-2-old analysis and tracking reports, we will have to use two separate
reporting systems: the in-house financial/operational system that interacts with
the highly-flexible, internet-accessible, Ultra-Plan
strategic intelligence system. Ultra-Plan’s distributor profit power reports:
·
Are
built on top of a breakthrough, software-as-a-service business intelligence
platform;
·
Have
distributor-specific, activity-based-costing models built in;
·
Have
been further tuned to support a number of strategic, service value plays like
the old-2-old recounted above.
·
Are
available over the ‘net after a one-week synchronization process with any
in-house IT system.
·
And,
deliver 2 to 10 times the payback of the monthly service fee (or you can
discontinue the monthly subscription).
For more
on the rapidly increasing number of “strategic profit improvement plays” that
Ultra-Plan supports, request the one-day seminar syllabus from bruce@merrifield.com.
©Merrifield
Consulting Group, Inc., Article 2.29
December
12, 2008
