Bruce Merrifield, President — Merrifield Consulting
•QPM •Quantum Profit Management (QPM) •business math for distribution •cost-to-serve math •LIPA •line-item profit analytics in distribution
Wednesday, February 14, 2018—Increase Profits: Rank Customers by Niche and Net Profit and Act Accordingly
If you sell price sensitive commodities, you might consider reinventing your service value by customer niche. Here's how to do it in eight steps:
1. For every customer, calculate this profit equation and create a ranking: Gross Margin Dollars – Cost To Serve Dollars = Profit Dollars
2. Sort the top 100+ customers into niches and lump the smallest 50% or so into a miscellaneous small segment.
3. Rank the niches by profit to get a bar chart ranking (there's an example in this video).
4. Visit five or so of your best customers in each target niche to uncover additional service needs. Each customer niche is apt to have one or more peculiar but common-to-the-niche unmet need.
5. Re-tune the SKU mix and fill rates for each target niche. Not every customer niche buys the same basket of products.
6. Be sure to have a team-selling solution model for large accounts that are seeking (or open to having) a supply chain partner.
7. Most small accounts will be losers despite high gross margin percentages. Assign them to a new, lower cost service model division to become profitable. Some accounts will switch their small gross margin dollar orders to competitors, but while competitors get busier and make less profit, reinvest your fulfillment slack back into steps 1–6.
8. Improve your innovation metrics such as making 100% of customers profitable, increasing target niche sales by 20%–100% and profits by 1x–5x, or increasing gross margin dollars per full time equivalent employee. (Watch your profits/FTEE soar. Why? How? Stay tuned for my next blog post!)
In this video you'll see an actual case study in which management was shocked to discover that the lowest gross margin percentage niche was the most profitable and the highest gross margin percentage customer niche–comprised of 40% of all the smallest customers–was a big loser.
This company, even with just okay execution of these eight steps, doubled profits in their most profitable niche, halved losses in losing niches, and tripled profits overall in just twelve months. This success came with only 20% of branch managers and sales reps becoming fluent in cost to serve math and motivated enough to pursue new results and metrics.
How do you get your people educated on cost to serve math?
Attend the Advanced Profit Innovation Conference (visit www.APICConference.com) on April 20th and 21st in Phoenix, Arizona. See you there!
Go to Waypoint Analytics (visit www.WayPointAnalytics.net) for a demo of their subscription web service and cost to serve math.
For more information about Bruce Merrifield, visit: www.merrifieldact2.com
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