Levers of Profitability in Customer Management

What are the levers of profitability as you consider customer management. Let’s look at volume, price, penetration and mix shifts as tools to increase profitability!

From this you will learn how to increase profits driven through selling activity.

You can sell more by seeking out new customers. You can increase prices across your entire customer mix. But is there a better, more focused way to think about this?

When I worked in a large corporate entity, we often talked about the levers of profitability.

Let us look at the levers of profitability.

Lever 1 – Volume

More volume is not always good.

If you have to price aggressively to take market share are you gaining more low margin business that is going to further depress your profitability while tying up valuable resources in your company?

Does your business have the capacity to increase volume? There are considerations to capacity such as warehouse space, warehouse personnel, shipping and administration.

Does increasing sales potentially drive you towards having to take on more costs to increase your capacity? If that is the case, you might actually fall behind financially rather than moving your business forward.

Lever 2 – Price

Can you take price increases that allow you to increase profitability within your current customer portfolio?

One increase on all products for all customers may not work and might draw negative attention to you inviting competitive responses.

A price strategy does not have to be across all the products that you sell or even to all of your customers.

This is where analytical tools can help.

Who are your lowest margin customers? Is it everything they buy or do an item or two erode all of that customer’s profitability?

If it is all that they buy, can you afford to keep that customer? It is all right to walk away from a customer that is costing you money and is not willing to have dialogue about turning this into a win for both of you.

If it is just a small number of items, what is the customer reaction to taking an increase on just those few items but leaving the higher margin items alone? The financial impact of employing this strategy across a number of customers is MASSIVE!

Who are your lowest margin suppliers? Is it all of their products or are there chronically underperforming items that erode your profitability? If it is a few items, do you need to sell them? Do you have alternatives within their product mix or can you turn to competitive offerings?

Are you experiencing price increases from your suppliers? Are you passing along the full impact of the increase? You better! Is there an opportunity to use the price justification from the supplier to sell their increase along with a little extra for yourself?

How do you price all of the products that you sell into a specific customer? Is it one markup applied across the board? Think of a grocery store and how they price items. Is it a “destination item”? An item that is high profile, price sensitve and often shopped around but draws customers in. For those items you have to be competitive. Is it an “add-on” item or an impulse purchase? This is likely a product that is not bought frequently or in great quantities and is not likely to be price sensitve. Why should your mark-up on that item be the same as the “destination items”? These you can have a higher mark-up on as it deserves more margin and is less risky to price at a higher level.

Lever 3- Penetration

This is another form of increasing volume, but one that is a little more strategic.

It is a lot of work setting up and selling new customers. The easiest customers to convince to buy from you are those customers with whom you already have an existing relationship. They understand the quality of your organization and they trust you and they keep coming back and purchasing.

If you have an understanding of who your most profitable suppliers are and what are your most profitable selling items, do a penetration analysis. Who amongst your top customers are not buying these products? Have your sales process target these customers with these offerings.

Design marketing and promotional campaigns geared around featuring the most profitable items to all of your customer base.

Try to identify new product lines that are complimentary to your current offerings that will allow you to sell more into your existing customers. This will help to maximize the financial impact of a delivery.

How do you identify these? Talk to your customers. Poll or survey them. What are some of their top purchases outside of what they buy from you that they would be interested in sourcing from you?

Another benefit of penetration is that the more lines a customer buys from you, the higher liklihood that they will stay with you!

Lever 4 – Mix Shift

This is the final lever.

What is a mix shift?

A mix shift is a product shift within a customer that takes them from a low margin, undifferentiated commodity to a higher margin, value added alternative that also delivers them superior cost in use.

Think of a men’s suit. You can buy a suit from a discounter that might look good initially but quickly wears out with a moderate amount of use. OR You buy a suit that incorporates a much higher quality of wool and is tailored for a superior fit that continues to look great and lasts considerably longer. In the long run, spending more on a better quality of suit means less frequent replacement and will ultimately save you money while you look great! (At least that is what I keep tellling my wife!)

Another example closer to my working world is handtowels. You can buy inexpensive roll towels, singlefold or multifold towels and run them through a basic dispenser or perhaps no dispenser at all. What do you get with a value towel? Generally a towel that does not absorb the water on your hands and forces the user to take far more towels then they should. What do you get with a basic dispenser or no dispenser at all? You get free flowing, uncontrolled access to the towels, once again creating an opportunity for users to take far more towels than they should. If you shift the customer to a higher performing roll towel that is dispensed through a dispenser that controls the access, you end up with a towel that performs (dries the hands quickly with a minimum amount of towels) and a dispenser that limits use. You have mixshifted your customer to a better performing combination of product and dispenser, charged a higher price and earned more margin and demonstrated a cost savings to the customer in terms of superior cost in use.

You have also given customer delight and created a better opportunity for your customer to think of you as a solutions provider and a valued business partner.

Conclusion – The Levers of Profitability

Do not be trapped into thinking increasing sales related profits is limited to “selling more” or “taking price”. There are a lot of extra ways to think through this with the assistance of some applied analytics. Finance and sales really can work together in a collaborative and proactive fashion to increae profits and revenues!

It is all right to want to have profits. You need them for your business to be viable. A good customer understands this too.

I am always willing to discuss how you might manipulate those levers of profitability!