Third Dimension of Profit
Many people have experienced love at first sight but on occasion your first instinct may
not lead to an informed decision. There are times, when business leaders are looking for
ways to improve their profit margins, their default choice is to painfully cut expenses or
pay dearly for new client sales revenue. However, there is another choice (and it is not
quite The Twilight Zone of business): the third dimension of profit looks at existing
revenue to see if it can assist in driving profitability.
It can become daunting to target 100% of clients when searching for ways to achieve
new levels of profitability. Instead, consider focusing on the top and bottom 10 percent of
your customer base. Companies often look at the whole picture and become
overwhelmed when trying to maximize profitability. For example, it is a common practice
to burden loyal long-term customers and those accounts that are in the middle revenue
range of our business with price increases, while avoiding asking the largest and
smallest customers to contribute. Starting with the extremes can get that elephant down
to a more manageable size and drive the highest impact on profit.
The Pareto Principle
This theory stems from the familiar business rule, The Pareto Principle, also known as
the 80/20 Rule.
In business 80% of our time is often spent on 20% of our customers. This causes some
people to spend 80% of their time trying to fix the 20% instead of reinforcing the 80%
and 20% dealing with the exceptions.
Many successful companies, spend 80% of their time focused on the 80% of accounts
that are already doing well and the remaining 20% of time focused on the 20% that may
not be quite up to par. For the purpose of this article we will discuss the clients that fall
into this 20% by addressing both the top 10% of volume and the bottom 10% of volume.
Bottom 10%
The bottom 10% of clients isn’t usually the first place companies would look to increase
profitability. However, one way to improving financial success is by implementing a
process called addition by subtraction. This process analyzes profit produced by the
smallest clients in order to ascertain which accounts are bringing value and how to make
these accounts profitable. Companies that are willing to subtract their smallest, low or
unprofitable clients will be able to reallocate time and resources that were spent to
service those accounts to the remaining profitable clients.
Reducing production and consumption costs for your company begins by targeting the
bottom 10%.
Using this process companies can add profitability through a reduction of revenue. This
can sound counterintuitive at first but revenue can be obtained from analyzing the
smallest revenue accounts.
The crucial step to improve weekly revenue is to set a minimum invoice rate for those
accounts that your company deems are too small and be prepared to separate from
those accounts that refuse to meet the minimum. The revenue created by those clients
accepting the new minimum can often offset the revenue lost for those refusing it.
Additionally, production and merchandise cost will benefit from the reduction of accounts
no longer requiring our products. Finally, the reduction of accounts unwilling to meet the
new minimum guideline will allow our service teams to reallocate precious service time
to our more profitable clients.
Top 10%
Strategic thinking and planning is required to embrace this unique way of approaching
revenue generation and the third dimension of profit.
One way to create additional revenue in the top 10% of accounts is to revisit unit prices
and find leaking revenue. It is important to remember that often due to competitive
pressures the largest clients make the smallest percentage contributions to profit
margins.
Generally speaking, our industry will stop at nothing to acquire a new account- including
providing rock bottom pricing as an incentive. However, what do we do when a $300
week account is affected by the economy and drops to $75 a week and is no longer
qualified for volume discounts? In this scenario, which may be occurring too often in our
current economy, we recommend pricing be reviewed in order to see opportunities that
are present within existing customers. Even those companies that believe that they have
safety nets in place to prevent this from occurring should understand that it’s worth
taking a second look to maximize profits.
Summary
Attaining profit from the top 10% and bottom 10% of your company’s accounts is a nontraditional
idea because most would balk at the thought of receiving increased revenue
from extremely small and larger accounts. This approach of targeting the top and bottom
is often overlooked and represents the third dimension of profit.
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