By Rich Bond
In Aesop’s Fable of “The Crow and the Pitcher,” a thirsty crow finds a pitcher of water but cannot get a drink because the pitcher has too long and narrow a neck. Being a clever bird, he collects pebbles and drops them in one by one, making the level of the water rise. Then, he is able to drink his fill.
You may wonder what this has to do with your business. I once heard someone liken gross profit margin to water in a pitcher. It has to be high enough to cover your overhead costs and provide the cash you need to keep your thirsty business running.
One key to keeping profit margins high enough is to measure customer profitability.
It’s easy to identify your largest customers; all you have to do is look at sales. But sometimes, the largest customer or segment is the least profitable. Most businesses lavish attention on their largest customers, whether they are profitable or not. Profitable growth requires focus on profitable opportunities, not the biggest customers.
It is essential to establish the means to track customer profit contribution. Each profitable customer is like one of those pebbles. They help raise the level of the water to provide more cash and increase profits. A controller or CFO with the right tools can analyze each account to identify the various costs incurred by each customer, specifically in relation to meeting needs through product servicing, specific product customization, and/or discounting. Failing to do so can be like leaving money on the table. Here’s how one company used this information to increase profits.
An electronics manufacturer got its start by selling to many small customers. As the company developed more sophisticated products, sales approached $10 million, but overall profitability lagged. The general manager replaced the bookkeeper with a controller who pointed out that small orders were 25% of sales but didn’t add to the bottom line because they had the lowest product prices. Not only that, the company had to fulfill the small orders at night and on weekends, increasing costs. The controller recommended increasing prices for this segment, which led to a doubling of profits.
Each one of those price increases was like dropping another pebble into the pitcher.
I know this story because I placed the Controller who made the recommendation to increase customer profitability.
Have you had a similar experience? I’d love to hear about it. Or if you want to discuss how customer profitability can help your business, give me a call at 203-221-3233. Together, we can find the right professional to monitor your financial situation and raise your profit margins, cash flow, and profits.