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:

1. Account for the time it takes to create a product or service for key customer segments.
2. Distinguish between the cost of creating the first customer order versus repeating the process for ongoing reorders.
3. Understand the varying levels of direct overhead (or overtime) that are required by different market segments.
4. 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?