Are You Managing Customer Profitability or is it Managing You?

Managing Customer ProfitabilityLast week I came across a listing of the Harvard Business Review’s “Top 10 Most Read Columns” on their “Working Knowledge” website, and of course the title “Managing Profitability” from 2003 caught my eye.  I was amazed – MIT author Jonathan Byrnes and I could have co-written the articles, so close are our experiences, case studies, and conclusions.  We both even use the term “profit levers”, which I thought was original to me!  As he wisely noted, “everyone pays attention to profitability but few companies have a process to manage profitability on a day-to-day basis.” 

My own frustrations with not having an effective profitability process led me to develop the Profit Maximization Breakthrough System, because I’ve observed that when we don’t manage profitability, it manages us.  Do you ever find yourself in “react” mode, accepting new customers or new deals that might make the short term numbers but which are not  profitable or good business in the long run?

So I wanted to highlight a few very key points that he made about the importance of proactively developing a profitability plan, and highlight some key challenges he’s found in studying companies across a wide range of industries who’ve tried to manage profitability:

Developing a profitability plan is a core leadership responsibility because:

  • in a difficult economy, costly new initiatives are not an option; more profit needs to be generated from the existing business
  • at least 30% of any company’s business by any measure (accounts, products, transactions) is unprofitable, offset by “islands of high profitability”
  • companies often miss their forecast profitability, even if every manager meets their individual goals, because there’s no coordinated management of the whole, and individual goals are often in direct conflict (witness a focus on Revenue in Sales vs Efficiency in Operations)
  • customer demands are shifting from “price” at the purchasing level to value at the  CEO level.  And value-add partnerships offer the opportunity to address profitability issues… but only if you have a proactive strategy so that you don’t miss the chance.
  • customer service expectations are shifting from simply providing quality products to using service to differentiate market positioning and escape the commodity trap.

Many leaders are reluctant to embrace profitability management because they:

  • fear that profitability management requires a capital outlay, and hence are reluctant to get started; in fact, it generates cash quickly
  • think its too complex [and many books and seminars present it that way] to see a clear path
  • are concerned that there are too many moving parts to be effectively managed
  • perceive a high risk of failure
  • anticipate too many people-related change management issues
  • believe that “customer service” is a cost, rather than a strategic profit lever which, when properly understood, can improve customer service and lower costs simultaneously.
  • simply have too many other priorities to devote the time they think is required.

Well, nothing should be higher on any executive’s to do list than minding the store – making sure that a strong bottom line can be maintained as a war chest to see the company through tough times, and to fund growth in good times.  Leaders who are not committed to building a profitability plan are either enmeshed in doing the wrong work or are not doing the work of a real leader.

And both Byrnes and I have worked with enough companies to know that each of these obstacles can be easily overcome unless the company falls into perfectionist tendencies during the analysis phase and needlessly complicates the process (hence my “dartboard” approach to determining customer profitability if you don’t currently measure it, and his “profit map” – both of which produce results just as good as sophisticated activity-based-costing systems).  The more difficult obstacle to overcome is that its simply sexier to spend money on shiny new initiatives than business basics.

And we agree that there are some simple next steps, which can be implemented on a “good is good enough to make a significant difference” basis:

  1. Conduct a comprehensive customer review and then secure your best customers, find more like them, grow the customers who could be doing more business, and change your operations to make unprofitable customers profitable, or gently terminate the relationship.
  2. Address pricing and price for value.  In one example, Byrnes cites a company who found that 80% of the value creation that the end-user customer paid for was created AFTER the product left the supplier’s shipping dock!  By adding a range of value-add services, the company was able to reduce final costs to the customer, while keeping a larger portion of the value-creation revenues for themselves.
  3. Differentiate through customer service, but keeping promises, anticipating customer needs, and creating new solutions for customers.
  4. Pull profit levers – Byrnes and I use some different categories and tactics, but the bottom line is to look for spending which no longer adds value, in product flow, sales and marketing expenditures etc.
  5. And I’ve added 3 Uncommon Growth Strategies to the profitability plan that I lay out in the Profit Maximization Breakthrough System™

Byrnes cites several case studies of soaring revenues and profitability.  My own experience illustrates that profit increases of 243-415% are achievable. 

So… what action have YOU taken to manage customer profitability lately?

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