Adam J. Fein: Profitable growth with technology

It is virtually impossible to improve profitability without the rich data available from sophisticated business systems.  But technology alone can neither remedy customer satisfaction problems nor provide specific business requirements. 

These data can only help if distribution executives are willing to ask tough questions, accept controversial answers, and devise actionable strategies for everyone in the business.  Here are a few sample questions that can only be answered once you have a solid technology platform:

• How many of our active accounts are profitable on an annualized basis?
• What is our annualized “customer churn” in (a) number of accounts, (b) total revenue, and (c) gross profits?
• Which services do we give away in order to retain customers? To whom?  Can anything be done about it?
• How many and which SKUs could we drop without having a significant impact on profits?

These questions deserve fact-based answers, not data-free opinions.  A good business system provides the opportunity to test management’s understanding with external, objective data on your own customers’ buying behavior. 

Unfortunately, some distribution executives have developed an unchallenged familiarity with customers through years and years of day-to-day account servicing. This “been there-done that” mindset blinds them to the reality of customer buying behavior or the company’s real profit model.  Your company’s total sales dollars with an account and a list of products purchased are insufficient to understand true customer behavior or account profitability.

I recently worked with a wholesaler-distributor struggling to improve bottom-line profits.  This company produced regular financial reports about its three major business segments, yet did not know anything about the profitability or cost to serve any individual account.  They focused on studying trends in financial reports but were blind to the real profit dynamics in their business.

After extracting readily available data from their business system, we were able to determine that almost half of their active accounts had average gross profits per delivery below the company’s breakeven delivery expenses.  We were also able to challenge conventional wisdom about large customers by showing that active accounts with higher gross profit dollars were bigger because they ordered more frequently, not because they placed larger orders.

These fact-based insights, drawn from customer-level analytics, led management to ask “How can we have profitable relationships with the customers that benefit most from working with us?”  Management could begin proactive discussions with the most profitable customers to identify win-win relationship strategies for building loyalty and lowering joint transaction costs.  The company also began providing its full suite of value-added services to the most profitable customers only, moving away from a one-size-fits-all service model.

In contrast, the bottom 20 percent of accounts was highly unprofitable and absorbed half of the company’s total gross profit dollars.  Self-service technologies were a win-win alternative because these customers did not provide the gross profit dollars to justify labor-intensive interactions or frequent deliveries.  See Customer self-service comes to wholesale distribution for more on how distribution executives can harness self-service technologies to boost profitability.

Fact-based analyses also lay the groundwork for successful strategic planning.  Once you have a fact-based understanding about today’s business, your management team can discuss how business will be different in the future. 

Ideally, your key customers would tell you how to anticipate their needs.  Realistically, their crystal ball doesn’t work any better than yours so you must maintain an ongoing dialogue about your customers.  Ensure your company is oriented to continuously learn about its customers by building account-level scorecards for your most profitable customers to track performance in real-time.

Becoming a customer-driven distributor requires commitment, vision and a ruthless focus on genuine customer needs.  Your technology system provides the raw data to prove that customers are not all equal. 

• Stop trying to indiscriminately acquire customers simply to spread the fixed costs of technology investments.  Instead, focus on retaining and growing with your most valuable customers. 
• Stop trying to be all things to all customers.  Instead, understand how your company really makes money. 
• Stop giving unprofitable accounts access to the same service bundle as your most profitable accounts. Instead, figure out which value-added services are profitable on a fully allocated cost basis.

Resource-intensive technology investments require dual strategies that balance current and future needs.  Get the most from your money by using technology as a tool for profitable growth.