We all need someone to push us outside our comfort zone – who does that for you? In honor of Manufacturing Month, this 1st of 6 blog posts, highlighting provocative, penetrating, and proactive insights every leader must have to better their business… but probably doesn’t. You’ll get access to valuable free training resources all month just by following this series, because I’m on a mission to get the manufacturing sector back on track, and reaching their profit goals.
Conventional thinking suggests that the P in the P.R.O.F.I+T Roadmap should stand for P&L. But it doesn’t. Because all too often a P&L is at best a statement of good intentions and at worst, an after-the-fact confirmation that profit was merely the leftovers of lower-than-expected revenues and higher than expected costs.
Instead, P stands for three Powerful Insights that you’ve likely never seen before, but which will push you outside your comfort zone and change the way you look at your business forever.
Your First Insight is Provocative
Have you ever wondered if you’re settling for too little in your business, and wondered what is truly possible?
You measure ROI, ROE, ROA, ROC… why don’t you ever measure ROP? ROP is Return on People, one of the most powerful KPIs you can add to your toolkit once you understand how to use it in ways that drive your business forward, rather than holding it back.
People. They’re your greatest asset when you’ve got the right ones. Your greatest pain in the neck when you don’t. They’re one of the biggest expenditures of time, effort, and money in your organization. And the only asset that walks out the door every night.
Each year I produce the Return on People Benchmark Report based on 500 of the largest companies in the world, and you can get a complimentary copy at the link above.
Here’s what’s shocking. In any given year:
- Almost 1 in 5 are losing money – their Return on People is actually negative, despite everything they’ve invested in their people: the salaries and benefits, the training and development, the coaching and motivation. They’re not running a business, they’re volunteering – working for less than “for free” for their customers!
- More than 1 in 3 who increase revenues in a given year actually see a decrease their profits. They’re “growing” in the wrong direction!
- 6 out of 10 don’t have the profit they need to fund the growth they want. They’re stuck, and settling for less.
You don’t have to choose whether to be big OR profitable. Instead, be big AND profitable.
Your Second Insight is Penetrating
Do you instinctively know that you’re losing money on some customers?
You measure revenue by customer all the time, but up until now measuring profit by customer has been a complex, cumbersome time-consuming, expensive, after-the-fact accounting exercise which fails to give you any insights into what your strategies should be, other than firing your unprofitable customers. And the last thing you want to do is lose much-needed volume.
Most companies get lost in a massive and somewhat meaningless cost-allocation exercise and give up trying to measure bottom-line customer profitability. Or, they get stuck just measuring gross margin by customer. That’s misleading, because all the profit leaks that turn a great top line into a mediocre or non-existent bottom line happen below the gross margin level.
What you’re doing today is no longer enough to take you where you want to be tomorrow. It’s time to take a snapshot of your Who’s Who of customer profitability.
What if you had an easy-yet-proven way to evaluate the profitability of your 100 biggest customers in less than an afternoon, and knew exactly what to do with that information to transform your profitability in less time per week then you’re spending on mail per day, without complex accounting?
Can you think of a dream customer, the one you wish EVERY customer was like? Can you think of a NIGHTMARE customer who makes you grind your teeth just thinking about them? If names readily spring to mind, you can do this.
Unfortunately, dream customers are often NOT very profitable because we bend over backwards to serve them! Sometimes nightmare customers can cost us a bundle, but sometimes they can be VERY profitable when we price for the pain-in-the-neck factor.
The process of getting good-is-good-enough-for-good-decision-making insights isn’t quite as simplistic as identifying dream and nightmare customers, but identifying your Who’s Who is just as obvious and instinctive, once you know the criteria you should be evaluating.
Every company has about half a dozen unique profitability drivers that are every bit as observable as the “dream” and “nightmare” classifications – you don’t need a big, expensive accounting exercise to get actionable information! When you put a cross-functional team in the room who can realistically categorize your customers on each driver, a very clear picture of customer profitability will emerge.
It’s time to know who’s who. Learn more about how to do this with 3 free training videos.
Your Third Insight is Proactive
The icing on the cake of the Who’s Who exercise is to turn your insights into the Customer Profitability Ratio and accompanying proactive Sales/Service Plan for results.
Data and information are two different things It’s not about 100% accuracy of the data. It’s about identifying the behaviors that drive profitability and then making small shifts for big impact.
The first time most companies work through this process, they’re dismayed to find that of their 100 largest customers:
- only about 10-20 are highly profitable
- about 40-70 are marginally profitable
- a whopping 20-40 are costing them more than they’re worth!
This is CPR for Your Business
Creating a powerful AHA! Moment with the Customer Profitability Ratio delivers almost immediate impact with your team, and delivers profitable shifts in behaviors almost overnight.
It’s easy for your team to understand that having 100 profitable customers for every 1 that’s unprofitable is better than the 5:1 or 10:1 – the usual range of the ratio the first time a company works through this powerful insight.
They can figure out how to move it to 20:1… 50:1… or 100:1, one customer at a time, in a way that they’ll never “get” just by seeing mind-numbing spreadsheets full of data.
They instinctively know that the higher that ratio is, the more opportunity and job security there is for them, therefore they want to be part of making it happen! If you’ve struggled to get employees to behave like owners and fully engage in driving profit and growth, I’ve just handed you the silver bullet.
The biggest surprise: your own self-inflicted wounds are the profit problem.
It’s tempting to write off the unprofitable customers as “bad”. But in 2 out of 3 cases, those customers are unprofitable NOT because of THEIR behaviors, but because of self-inflicted wounds on the part of YOUR company that are completely within your control to fix! That realization empowers your employees to be accountable and to proactively take steps to heal those wounds.
It’s time for everyone to step up and make a difference
You now know the P: Provocative, Penetrating, and Proactive Insights.
Next, we’ll explore the R in the P.R.O.F.I+T Roadmap.
What was the biggest insight you had from this article?