You manage what you measure…
When it comes to customer and product profitability, elite companies relentlessly measure and manage the drivers and outcomes.
Elite business executives are familiar with their company’s income statement and the key underlying performance drivers of price, volume, fixed and variable costs, and invested capital that drive their profitability and enterprise value. Accounting reports, however, fail to reveal the profound variability of profitability within the business and its underlying market, customer and product segments. Starting at the transactional level and building up to the Vendor/Product Family, Customer, Sales Territory, Branch, Customer Group, and other levels, there are profound variances and distinctions in net profitability that are obscured by overall revenue and gross margin statistics usually used to assess desirability or success.
Each business’s ultimate net income is ultimately a struggle among three distinct groups of products and customers:
- Profit Makers (those that contribute to Peak Internal Profitability);
- Profit Neutrals (those that essentially match or maintain Peak Internal Profitability); and
- Profit Takers (those that reduce Peak Internal Profitability to actual net profitability).
For every business, the dynamic of this struggle, and efforts to understand and affect it, determines the Actual Net Profit of the business – and hence a company’s enterprise value and ability to target and manage to drive profitable growth.
The difference between Peak Internal Profit (PIP) and Actual Net Profit is the Profit Opportunity. Peak Internal Profit is typically 1.5x to 3x or more the Actual Net Profit. For a typical 4% EBIT distributor, its PIP is actually 6% to 12%. In other words, that distributor is squandering 1/3 to 2/3 of its profitability by taking on Profit Takers. By remediating or discharging (as appropriate) its Profit Takers, improving its Profit Neutrals, and growing/targeting its Profit Makers, any business can align its resources toward optimized, profitable growth.
In simple terms, most front-line employees and their managers don’t know which products or customers are Profit Makers, Profit Neutrals, or Profit Takers. They thus fail to identify and remediate the profit takers, reducing net income and enterprise value. They also fail to focus the sales and customer-support teams on those market segments that drive profitable growth and industry leadership. Lacking critical metrics of true profitability, sales forces become Indiscriminate Order Takers.
ProfitGPS™ provides sales and customer-facing employees with the critical metrics to improve customer profitability by 25 to 50 percent or more, pivoting the sales force towards a sharpened, disciplined, Strategic Market Maker. Strategically, ProfitGPS™ helps executives pivot their companies from Red Oceans (markets defined by intense competition and low value-add) to Blue Oceans (markets defined by strong growth and high value-add). Your company’s enterprise value is ultimately defined by whom you serve, at what terms, and with what focus.