Sales and Profitability

By Chris Stern

Savvy executives are aware of key success factors for their businesses. In many cases, this is a no-brainer for entrepreneurs, who know their leverage factors and have them under tight controls. But will this be valid tomorrow?

Besides the fact that local businesses is soaring and the U.S. economy is booming, we are in times of rapid change. Nobody can predict how business-to-business e-commerce (also known as "b2b") will change even protected industries like housing and construction. While b2b will grow from $70 billion this year to $1 trillion by 2004, e-buying can reduce dramatically purchasing costs for those participating as purchasers. It will put immense pressure on suppliers, who may have little choice but play the game. Changes will come fast, and will strike unprotected companies from any "old boys' network." It is wise to have a profitability watch system installed, monitoring every product or service-line for its potential and vulnerability to e-reengineering.

Such an early warning system initially should be built around the traditional factors influencing profitability: sales, costs, margins and capital. In a later stage, it can be fine-tuned around the organization's specific key success factors. To design such a system, it is important to understand the four elements of profitability a little bit better.

Your Profitability Factor # 1 Is increased Sales

Want to be a Millionaire? Sell more, make more money: True or false? Final answer: No, not necessarily true! It depends on the profit/cost per account and where your sales come from.

How can we increase sales? The establishment of new customer accounts ranks number one in the answers that a sales force usually gives during retreats. New customer accounts have to be attracted by marketing activities and are an expensive, precious gem. The cost of new accounts, even walk-ins, can be substantial. Costs are measured by dividing all marketing and sales expenses of a company with the number of new accounts generated during a period. Every action decreasing the costs of a "hit" should become a prime target on your task list.

Channels are the ways you offer your product, which can be wholesale, retail or performance space (such as restaurants). They may include a quality sales force with or without intermediaries like brokers or Realtors, or they may be purely virtual over the Internet. Channels are measured in efficiency, for example, the numbers of "hits" they create in a certain period of time. Measurement should include the assessment of channels in regards to existing and new customers.

What is the part of your sales in the total selling potential of an account of a customer? This is your ratio of customer potential. Satisfied customers will buy more, or even enter into a prime contractor relationship with your organization. This will reduce the marketing efforts you have to spend on this customer and may negotiate better prices.

You may need to conduct Customer data-mining to find out what your share is of the total purchasing potential of each of your accounts. A landscaper just having contracted a job to a new homeowner may offer lawn services at a favorable cost. If he or she has done a good job in designing the garden, most of the time the landscaper will be able to enter into a long-term relationship with the homeowner to cut and maintain this garden. In many cases, the customer will even refer all gardening services to this landscaper and stay with this company, if the level of quality stays acceptable and the relationship is pampered. This landscaper realized that the potential was there for more business than just installing the plants.

Customer migration has nothing to do with the IRS. If customers migrate, they walk away from your revenue. Unwanted walk-aways are multi expensive signs of failure. A precious client lost to the competition is a give-away to your opponents, which will save them marketing costs that they would have had to spend to gain this account. Secondly, the loss has to be compensated with unplanned costs for marketing and sales. Thirdly, every walk-away will talk about his or her experiences with your business and scare away about 10 existing or potential customers. Do your sales folks know this?

However, there are situations when walk-aways are welcomed or even provoked. In fact, a company may have to decide which customers it should serve and which accounts cannot be served profitably. A company knowing how much each account is contributing to the bottom line has a base for decision making and can manage its customer portfolio proactively.

Higher sales obviously are the most common way to increase profits. If your revenues grow, you may reach barriers of capacity, which will have you working day and night while not making more profit. You stepped into a common business trap: Your increased output with a negative impact on your margins. Look for my next Strategic Directions column in this magazine to learn how to get around this common problem.

Chris Stern is CEO of IFEM.COM. IFEM is a consulting firm in Bonita Springs, improving performance of all businesses.