Article 2.30
DOWNSIZE STRATEGICALLY TO REINVENT SERVICE VALUE PROFITS
The economic
and financial conditions behind the global, economic slump of Q4 ’08 promise a
tough 2009 for most businesses. What else should we do besides the standard
downsizing moves that parallel declines in our average sales and margin
dollars? How do we carefully: either sculpt away our corporate bloat (losing:
customers, products, people); or, redeploy losing-activity resources into revitalizing
the ripped, profitable athlete that is hiding within the general average
numbers?
DE-AVERAGE OUR
FINANCIAL NUMBERS
Our
financial numbers are average totals that comply with accounting rules to pay
prompt, accurate taxes and borrow against current assets; they have nothing to
do with delivering best, total service-value metrics to best accounts within
best-for-us, customer niches. What if we “de-averaged” our numbers to find that
the conclusions of many “cost-to-serve-customer” studies apply to our business
too: somewhere between 20 to 40% of our customers are generating 150% or so of
our profits to offset the losses that we get by over-serving and under-charging
50% or more of our customers.
With
deeper analysis into this area, we will find active accounts that do not have
the average-order-size-volume needed to generate enough margin dollars to cover
the total transaction costs of traditional wholesale services. They should go
to a cash-n-carry “wholetail” store like Granger or Fastenal that has a
business model for making a profit from such customers and orders. Have distributors
been historically so product and sales growth oriented that many are guilty of
selling too many products and services to too many different types of customer
niches with one common service value equation? How should we rank all of our
niches by estimated profitability, than what?
THE HOW-TO RECIPE FOR
CUSTOMER NICHE IDENTIFICATION
Here’s a
customer-niche identification and measurement exercise for distributors:
I.
(In
a sales meeting) code every active account (above some worthwhile activity
level, if not all) by the following dimensions:
A. Traditional customer segment that everyone in the industry uses: industrial,
contractor, dealer, etc.
B. The size or strata of the customer within the segment with volume boundaries
determined by the most effective and affordable business-model way of selling
them starring the “selling mode”:
1.
Full-service
with outside sales rep assignment (“A”
strata)
a.
What
is the minimum monthly margin dollar activity level and average order size that
will support this model?
b.
This
strata can be further split into finer levels for super-big accounts; what, for
example, is the boundary between “AAA” and “AAAA” accounts and what extras do
4A’s get that 3A’s don’t?
2.
“B” strata or “wholetail”: these accounts are
in between traditional, full-service activity and public/consumer retail
activity. Many of these customers buy in regular, but small quantities and
really want wholesale services, they just don’t want to pay for them and won’t
if a distributor chooses to serve them at a cost that exceeds the margin
dollars.
3.
“C” strata or retail or web-store accounts.
These are small order customers that buy occasionally and randomly
C. What is the customer’s purchasing value mindset:
1.
Buy
from my best friend(s) even if their prices and service are a bit
non-competitive: relationship buyer.
2.
Buy
the best total procurement cost, service
value (however they define it), because consolidating paperwork costs
and maximizing uptime are valued. (“Aggressive” value buyers pretend to be
“price buyers” in order to get good service and low prices.)
3.
Price buyer that bids out most everything and
cherry picks the best prices. These accounts are genuinely pennywise and
pound-foolish, although many learn from “bargain price, bargain service”
experiences to become value buyers.
D. What is the customer’s growth rate compared to their industry
average:
1.
Star
(5): perpetual innovator, growing 2-4 x industry rate; only 5%
2.
Above
average (4): hard-working imitators of innovators (10%)
3.
Average
(3): 70% of all customers; just reactively surviving
4.
Dying
slowly (2): being harvested; 10% of the group
5.
Dying
quickly (1): crisis mode; 5% - perhaps higher in 2009
RUN AN ARRAY OF
CUSTOMER PROFITABILITY RANKING REPORTS
Customer
profitability ranking reports are the doorway to understanding the true sources
of most companies significantly, cross-subsidized profits and losses. Many new
insights and tactical plays emerge from such analysis.
Ranking
reports to run include:
1.
Ranking
all of a profit center’s active accounts on one master report. Include cumulative-ranking
columns to see what percent of the customers account for what percent of the
profits at interesting levels, because many employees will take many
educational repetitions before they start to believe the results. Typical
results are: top 10% of customers => 95% profits; top 20% => 120%; and
the bottom 1% => destroy (20%) profits.
2.
Do
similar sub-ranking reports for:
a.
Each
sales territory. Rank the reps by how much profit they are generating for the
company. Note that the reps with the highest margin percent averages generally
have the least profitable territories, because the small, average margin
dollars in their orders don’t cover the transaction costs.
b.
Rank
all of the segment-strata niches by total profits generated. What are the
companies two best? Why? What are the company’s worst niches? Why? What other
competitor(s) is serving the worst niches better with a different business
model? Guestimate what share of each niche’s total potential profit pool we
currently enjoy? A goal should be to have at least 50% of the profit pool of
any given target niche. Why? How?
c.
The
other niche dimensions - why customers buy; and how fast they are growing or
dying - will help to determine if current marginal or losing accounts are worth
transforming into profitable accounts or sending them a letter dictating new terms
that will make them either profitable or leave. Could the defectors go to new,
wholetail, spin-out business that you open or to a re-seller partner of ours that
has a business model that can make money on a cash-n-carry basis?
WHAT PROFIT-POWER
PLAYS EMERGE?
From these
reports, it will be quite evident that we should:
2.
Sign-up
2-5 of our most profitable, progressive and open-to-us customers in our #1
niche to be advisers for re-inventing our “service value equation” for that
niche (lots more to this play).
3.
Identify
5 best, upside-growth and growing customers within our #1 niche to team-sell in
order to crack and partner them so they can grow us.
4.
Rank
the most popular items bought by all of the customers within a target niche to:
a.
Beef
up the fill-rates on the best items (google: “fill-rate economics”).
b.
Create
lists of most popular items that each niche customer is not buying from us and try
to win that incremental business.
5.
Identify
all of the marginal and losing accounts that:
a.
don’t
fit our business model;
b.
aren’t
within a niche that we can be competitive with except to get occasional small,
money-losing, fill-in orders; and
c.
are
shrinking into bigger losers and indirectly invite them to go elsewhere so that
we can either layoff more expense dollars than lost margin dollars( by about a
2:1 ratio) or redeploy some of that activity energy into growing our best
accounts.
6.
Downsize,
upgrade, refocus, reinvent and re-pay our sales force? Most distributors who
have gone to market with outside sales reps since “the beginning” now have too
many reps calling on too many B and C accounts. By putting the very best reps
on only A accounts and laying off the least effective reps, a lot of good
economic things will happen. When we put our best people on the best target
accounts within a niche for which we have the best total service value
offering, sales will typically go up more than 20% for the niche within six
months! And, with the new, only-A-account territories, there is enough margin
dollars to maintain and capture that the company can go to a new compensation
plan base on “delta profit” increases rather than some percentage of sales or
margin which pays commissions on losing accounts and turns reps against the
profit improvement plays.
WHERE TO GET THE ANALYTICAL AND MANAGEMENT INFORMATION?
The keys
to “de-averaging” a firm’s current financial reporting capability is to obtain
the right strategic business intelligence capability that already has:
1.
Wholesale
diagnostic templates and plays built into it.
2.
Offers
educational video and consulting support to help all key employees to see the
business in new ways and believe that the “revolutionary” plays above can yield
revolutionary results for all stakeholders.
3.
To
buy these services on a fast (up in one week!), flexible (monthly payments),
as-needed basis (stop the service when you want) through a browser.
There is
only one solution provider within the wholesale-distribution industry that I
know of that can provide all of these benefits: Waypoint Analytics. If you
would like to attend one of Waypoints all-day seminars to benchmark your
existing Business Intelligence capability against Waypoints to decide whether
you would like to knock off all of these capabilities in-house or rent the
service for whatever time is needed, please contact me.
bruce@merrifield.com
919/933-7474
©Merrifield
Consulting Group, Inc., Article 2.30
January,
2009
