Four Signs Your Gross Margins Are To Blame
Your gross margins are to blame
If a customer is not profitable, then selling more just like them may not help!
Quite often, decisions to sell to a given group of customers or prospects are made by analyzing the “S” of SG&A (Sales, General and Administrative) on a company’s P&L statement. Rarely are the direct costs of creating a product or service broken down by customer segment.
Instead, a go/no go decision is often determined solely on the project’s cost of sales. Unfortunately, this implies that the direct cost of creating every customer’s purchase is equal and fixed.
In many cases the direct cost of producing a product or service can vary by marketplace, customer needs or usage. This hidden cost data may not be captured through traditional cost accounting practices. To assure that your gross margins are maximized within different customer segments, it is critical to:
- Account for the time it takes to create a product or service for key customer segments.
- Distinguish between the cost of creating the first customer order versus repeating the process for ongoing reorders.
- Understand the varying levels of direct overhead (or overtime) that are required by different market segments.
- Identify the differences in returns or rework among major customer groups.
A close look in this area may generate a clear opportunity or problem area.
If we accept the 80/20 rule as a sacrament of doing business; which pockets of your business are contributing and which are being subsidized?
Adopt Orphan Products Or Services For Profitable Growth
As Paul Simon sings, “One man’s ceiling is another man’s floor.”
One man's ceiling is another man's floor.
One casualty of all the corporate downsizings, bankruptcies and restructurings are customers. Many are now being neglected by their vendors. Suppliers have cut staff, dropped service levels and assigned junior people to key accounts.
With so many companies focusing on fewer products, services and customers, why not make a home for another company’s cast-offs? What a great source of profitable growth for your company!
Here are five such ways to profitably grow your business.
1. Ask your customers which products and services their suppliers are ignoring.
2. Notice which competitors are increasing their outsourcing, online service or prices and offer their customers traditional services they prefer.
3. Sell your competitors on selling you their unprofitable customers.
4. Partner with your customers to meet their customers’ needs.
5. Work with your suppliers to service their other customers’ customers that they see being neglected.
Whenever companies are being bought, sold and closed, their customers are often innocent bystanders or unintended casualties. Swoop in with your great service and support and save them. They will never forget you for helping them in their time of need.
And you could have a brand new source of profitable growth!
How Can You Afford Not To Know? How Much Is It Costing You?
As we climb out of this great recession, we have all learned to run lean and mean.
We spend less and consume resources ever more efficiently.
But have we any better idea of our costs of doing business? And how have they really changed through the recession? Knowing our costs allows us take better risks and make ever better pricing decisions. And now more than ever, when we decide what to sell, who to sell it and what to charge we must be right.
As business owners do we get an A, B or C when it comes to knowing how much our product or service costs?
Take this test to see how well you do. On a scale of 1-10, with 10 being the highest, circle your answers to the following questions.
I know my:
1. Total direct labor and material costs. 1 2 3 4 5 6 7 8 9 10
2. Average or standard direct labor and materials by market segment; product family or major services. 1 2 3 4 5 6 7 8 9 10
3. Actual direct labor and material costs by individual customers, orders, services or items. 1 2 3 4 5 6 7 8 9 10
4. Monthly fixed costs and break even production level of goods or services.
1 2 3 4 5 6 7 8 9 10
5. Overhead expenses are fairly allocated to every sales order and proposal to maximize profitable sales. 1 2 3 4 5 6 7 8 9 10
6. Costs of finding, keeping and growing a customer. 1 2 3 4 5 6 7 8 9 10
7. Pricing, purchasing, staffing, and servicing decisions are based on real facts and current information instead of emotion and old data. 1 2 3 4 5 6 7 8 9 10
Add up your answer to the seven questions and grade yourself.
If you scored 60-70, give yourself an A!
Congratulations, you have true costs, know how to apply them on an individual customer basis and do so in growing your business.
Now you can go on and really exploit your knowledge by:
- Reducing or increasing prices to increase your margins with individual customers.
- Determining the product lines or services that have to be profitable on their own and the ones that can be loss leaders or impulse items.
- Focusing your staffing, materials, inventory, and purchasing departments on saving and making you more money where it matters most.
If you scored 50-60, give yourself a B.
Yes, you have a costing system and while it may not be correct on an individual basis, you do have some structure and discipline in your pricing and investment decisions. Now it is time to bring on a financial/marketing analyst to dig into the average numbers and start rooting out hidden opportunities in your business like:
- Creating a structure of product parents, grandparents and children to bring order to what you make and sell.
- Assuring your breakeven numbers are being used in establishing your monthly pricing.
- Driving your financial, materials, purchasing and staffing functions to manage their costs for profits.
If you scored below 50, you get a C and need a wake up call.
Your costs and your subsequent decision-making is flawed. Where you think you are making money you may not and vice versa.
Get started by:
- Making your business run by the numbers. Hire a plant accountant or business manager as soon as possible and uncover your direct materials and labor costs to forecast your overhead.
- Developing a manual costing system before you invest in a CRM or ERP system. What doesn’t work manually will not work when it is automated!
- Changing your peoples’ thinking on this, or change your people. Regardless of whether your margins and prices are high or low, you cannot manage your business if your people are not managing its costs.
Knowing what your products and services cost is imperative to your profitable growth. You will succeed only when you are sure you know… How Much!
When Profitable Growth Fizzles
It happens too often.
You launch a new product, service, sales initiative, or marketing program with fanfare and high expectations.
As soon as the kickoff is over, your eyes turn to results. At first, sales trickle in. Then the trickle becomes drizzle. But the downpour never comes.
The program is neither a success nor a failure, but the market response did not meet expectations. These questions remain unanswered:
- Do we have the right product or service?
- Have we positioned it correctly?
- Are we packaging, promoting, and pricing it correctly?
- Do we have the right market?
- Are we selling it correctly?
While your staff will answer these questions with the best of intentions, you are left with the same dilemma: fish or cut bait. Do you reinvest to find out if the initiative can be successful or cut your losses now? Financial analysis only helps so much. Sure, breakeven analysis and return on investment are important tools, but their assumptions will kill you because there is no historical data.
So it comes down to your judgment: “Do I kill the effort or let it ride?” In making further investments, there is another fear. What if, after further effort, the results are still inconclusive?
Here are five steps to evaluate any new product, service, or program initiative:
- Reconfirm the objectives and sales or marketing process of the initiative.
Are they realistic? Many initiatives in business fail because expectations weren’t set, agreed upon, and met. Sales and marketing efforts often fail due to forecasts based on market ignorance or under-funding based on the need to limit risk. If the goal is finding, keeping, or growing customers, clarify this. Or, if the goal is creating more leads, reorders or referrals, make it clear. Otherwise, results are hard to predict or see. - Require the champion and the implementers of the initiative to demonstrate a model for needed success.
Too often, the visionary who developed the idea is not as experienced in implementing it, or vice versa. In fact, it may not even be the same person. Demand a clear model for success. - Establish probabilities of success.
This is where judgment, intuition, and previous experience converge. Bring your team together and agree on the probability of expected results. - Set up a field “test-kitchen” to demonstrate the required success.
Stack the deck in one of the following ways: pick a great sales territory, simple product version, or traditional sales tactic and test your initiative. If it is not successful, let it go. Be ruthless in preventing “scope creep” of the test, and stay committed to seeing it through. - Pick a drop-dead date or event.
At a certain point you must make a decision. Choose a moment in time or define a reaction by the marketplace and let this be the finish line.
Tests like this always force a decision. They should not take longer than two or three months and frankly, in Internet time, can occur much more quickly. The burden of the questionable initiative is that it saps the financial and human resources of an organization, creating dissension and finger pointing. Sometimes it’s better to cancel a promising initiative than to watch it malinger.
And maybe the timing is the problem — it’s just not right for your organization this time.
10 Signs Your Growth Plan Is Secret
While you know how your company creates profitable growth, do others?
In spite of all your meetings, strategic planning efforts and company mission statements, are you sure your constituents get how your firm makes money?
Are all your internal departments making, spending and saving money towards the same goal? If not, many inside and outside your company may be squandering your resources or working at cross purposes.
Here are the 10 ways to tell if your company’s plan profitable growth is a secret.
Is your growth plan a secret? Asks small business growth expert Andy Birol
- Few of your management team and none of your employees understand your company’s business model or know how your business makes money.
When asked, they revert to talking about how long you’ve been in business as proof that legacy means current success. - Your customers do not know why you cost more than the competition.
After you explain all the disadvantages of buying competitors don’t provide, your customers still don’t acknowledge your added value. - Even you’re not sure what it costs you to find, keep or grow customers.
In response to such questions, you find yourself dieseling, much like a jalopy that continues to sputter after the key is out of the ignition. - When asked by a reporter which market segments offer your firm the best opportunities for future growth, you don’t answer them, not because it’s a secret but because you aren’t sure.
- Your sales force blames your high prices for not hitting their sales quotas while they brag about the excellent service they provide.
- Your compensation plan doesn’t reward your executives for achieving your company’s profitable growth.
Instead of planning to spend their bonus on a trip to Hawaii, you find out they’re booking a weekend in Topeka and not taking their kids. - One of your vendors suggests that if you dropped your prices you could sell a lot more of your products and thus buy more from her.
Clearly they don’t see the value your firm is adding to what they are supplying you. - Your closest friends give you bad or unprofitable referrals.
At a recent get-together, your friend tells you about meeting three of your most desirable prospects. But he didn’t think you would want to pursue selling them. - Your spouse cannot explain why your company is the premium provider.
When asked by her or his friends to describe why your firm is so expensive, she or he turns to you to explain it correctly. And when you encourage her to do it alone, you constantly interrupt her to correct his or her mistakes. - The reasons your customers say they buy from you do not match the reasons your sales force says sells your customers.
As the old saying goes, people don’t buy shovels, they buy holes. Sadly, you worry your customers are asking for premium swimming pools and your sales reps are selling low-cost excavations.
While stories of disconnected companies can be hilarious, they are not funny when they are about yours. When your plan for profitable growth is clear to your team, their actions are more likely to contribute to your objectives.
Convey how your company will achieve profitable growth and make sure everyone around you understands.
