I’ve implemented net-profit and cost-management analytical applications – that include realistic, indirect cost at customer and product levels –at a variety of companies. Without exception, each one rapidly and significantly improved the bottom line.
Most companies know revenue, discount, COGs, and some direct costs at the customer and product level, but to complete the net-profit picture, they also need realistic indirect costs, which includes acquiring, supplying, and cost-to-serve.
Improving Customer and Product Bottom Line
Most analysts and experts say that knowing the true net margin at the customer and product level allows you to answer the question ”Which of my customers are profit destroyers and which contribute most to net profit?”
You can successfully improve net margin and reduce indirect costs radically by simply using an analytical application solution that gives you visibility into margin, direct costs, and all/most indirect costs across key dimensions, including customer and product. This knowledge allows you to uncover cost anomalies and understand why they occur.
This type of profitability and cost solution should easily shave 5 percent off your indirect costs per annum, which at a company with a $2B turnover and $200M in indirect costs would be a $10 million improvement in net margin. This means a game change and huge competitive advantage over companies that don’t invest in the analysis.
To obtain indirect cost information companies are turning to solutions that allows you to allocate cost to customer and product level by cause and effect methods as well as analytical applications to provide the visibility and analysis.
The Iconic Customer Whalebone and Other Analysis
The Whalebone Curve or (Cliff Curve) illustrates a company’s profit through the customer contribution to cumulative profitability, broken out by profit creators, break evens, and profit destroyers. The particular whalebone curve shown below beautifully illustrates how in a particular company a few customers generate the majority of the bottom line profit, while many more destroy a big portion of potential profit.
Obviously, having a customer-centric approach (advocated by Peter Fader) means focusing on the most valuable customers for improved profitability and how to best serve and retain them.
However, there’s also an opportunity to reduce the lost profit caused by profit destroyers. By focusing on profit destroyers, particularly those with high revenue, you can transform the relationship with profit-destroying customers, dramatically reducing your costs/lost profits.
How? Using customer benchmarking analysis that shows account managers or other decision makers where interactions with their customers are effective and efficient, and where they can make improvements using informed customer account negotiations. Examples of this include:
- Customer segmentation bubble charts
- Customer cost profiling
- Customer P&L analysis
All of these focus on indirect, activity costs, and other causal factors that are causing poor performance.
In today’s customer-centric business world, having visibility into customer net margin and realistic indirect cost gives you a distinct advantage over competitors that don’t have this intelligence.