Tag Archives | customer

Customer Profitability

See also:
Identifying Profitable Customers
Segmenting Customers for Profit
3 Benefits of an Analysis of Customer Profitability

Customer Profitability Definition

The customer profitability definition is “the profit the firm makes from serving a customer or customer group over a specified period of time, specifically the difference between the revenues earned from and the costs associated with the customer relationship in a specified period” (Wikipedia). In other words, customer profitability focuses on the profitability of a specific customer. How much revenue do they bring in? How much time, resources, etc. do they require from your company? By calculating the profitability of each customer, you have some great business insights on productivity, resource allocation, etc.

For example, if your customer service department is overwhelmed with work, then you can assess the number of requests per paying client. If a customer that is at the towards the bottom for revenue and the top for requests, then you can conclude several things. Those can include that you need to either increase their price, fire that customer, or limit the amount of requests for that customer.


Click here to Download the Pricing for Profit Inspection Guide


The Purpose of Measuring Customer Profitability

Customer profitability is a key metric utilized to inform decision making in various areas of the company. These decisions affect the value exchange between the customer and the company. Once we measure the profitability of our customers, we are now able to understand who our customers are and how we make a profit. It can provide great insights on the business that lead to focusing on what is best for the customer.

How to Measure Customer Profitability

Before you measure customer profitability, you need to confirm how your company calculates revenue and expenses. Remember, Profit = Revenue – Expenses. Some companies recognize revenue when it is received (cash basis accounting). But we recommend that organizations use accrual basis accounting – or recognize revenue when it is earned. If you are bigger than a hot dog stand, then you should be using accrual accounting. In regards to expenses, it’s also important to allocate as many expenses through the customer as possible. Think about capital, debt, operational costs, etc.

Once you have figured out the respective revenue and expenses for a specific customer, then you are able to calculate its profitability. Next, you need an analysis all of your customers.

Customer Profitability Key Performance Indicators

There are various KPI’s that can help you understand how your customer profitability is doing at the moment. Here are examples of a few:

Average Revenue Per User (ARPU)

A measurement of the average revenue generated by each user or subscriber of a given service. Use the following formula to calculate the average revenue per user (ARPU):

 Total Revenue / Total # of Subscribers 

Customer Lifetime Value (CLV)

A projection of the entire net profit generated from a customer over their entire relationship with the company. Use the following formula to calculate the customer lifetime value (CLV):

Annual profit per customer X Average number of years that they remain a customer – the initial cost of customer acquisition

If your customer isn’t valuable or is costing you too much, then reassess your pricing. Click here to learn how to price for profit with our Pricing for Profit Inspection Guide.

Customer Profitability Analysis

Customer analysis, defined as the process of analyzing customers and their habits, is one of the most important areas of study in a business.

By observing the actions of various customers you start to see a trend of what your average customer is like and what their habits look like. This is a hint at who your target market could be. Behavioral trends amongst customers are important in how your company decides to carry on their marketing efforts. Once you analyze your customer base and determine your most profitable customers it is important to allocate the majority of your efforts towards them to make your most profitable customer your target customer.

Managing Customer Profitability

Managing customer profitability is larger than just the sales or fulfillment of product/service for the customer. It also includes marketing, finance, customer service, product, and operations. If you manage the profitability of customers, then you will have a better chance of catching areas of inefficiencies.

Areas to Improve Profitability

Some ways to improve customer profitability are to change the way you provide commission to the salesperson. Instead of paying their commission based on revenue, base it on the profitability. This can either be focused on the margin percentage (i.e. a sliding scale) or on the dollar amount in profits.

Why It’s Important to Manage

Managing customer profitability is important for various reasons, not only does it set you apart from the competition by providing more value to your customers, but it also improves the company’s revenues. When you manage customer profitability you are making the value exchange from company to customer more efficient and more profitable.

If you are looking for other ways to improve profitability, then download our Pricing for Profit Inspection Guide.

Customer Profitability Definition, Measure Customer Profitability

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Customer Profitability Definition, Measure Customer Profitability

 

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Increasing Pricing on Products

increasing pricing on productsRecently, Netflix – streaming service giant – increased their pricing on two of their products by more than 10%. At first, media and customers displayed anger and backlash. But after the pricing increase, many customers remained at the increase was approximately a $1 difference. Plus, you have to factor in that many people are “cutting the cord” from traditional cable companies and converting to streaming services, like Netflix, Hulu, and Amazon Prime, for their entertainment. Netflix isn’t the first company, nor the last, to increase their pricing on products or services. But how to you manage to increase pricing without losing customers?

Increasing Pricing on Products

Increasing pricing on products is a result of various things – such as increased costs, additional services, improved quality, etc. When a company decides to hike their prices, we found that it stemmed from either two things: costs increased or they had their economics wrong in the first place. The other big one is taxes.  Taxes actually increase prices.  Companies that have their act together and run a streamlined operations will capture even taxes in their costs, even it is “below the line”.   Be assured when taxes go up, so do prices to the end user.  One of our goals when we work with clients to be more profitable is to look at their prices. Will increasing the price retain more customers or drive them away? Will there be more value added to compensate for the increased prices? When do you increase prices and how?

When to Increase Prices

Timing is everything when you want to increase prices! If you time it wrong, then customers will be annoyed that they didn’t get the special or backlash because their monthly payment just increased a certain percentage. Netflix timed their pricing really well. Because they were releasing a new season of House of Cards, Stranger Things, and The Crown (all of which have been award winning and original content) within the next month or two, Netflix was able to communicate added value. For that extra $1, you will get more seasons of your favorite shows.

But what if you aren’t a streaming service? For example, you may be a Tax CPA firm. If you needed to increase prices for your services, then the wrong time would be in the middle of the tax season. Find those gaps between the rush of customers and communicate the value – even if you aren’t necessarily adding anything new. Be sensitive to price increases and avoid the “shock” factor.

How to Increase Prices Effectively

When you have figured out the timing of when to increase prices, you have to answer the question, “how to do it?”. As a financial leader, this is where you cross lanes from the accounting department into the operations, sales, and marketing departments. You know the economics of your company, but if the salespersons cannot sell the product/service at that price, then it will fail.  I actually had a CFO tell me that they had a “pricing problem”.  Come to find out, they did not have a pricing problem.  They knew exactly what the price needed to be, they had a management problem because the sales guy did not want to put pressure on his buddy who is the buyer.  I guess the sales guy was afraid of losing the invitation to the annual fishing trip.

Pricing is a sensitive subject. We get it. But are you pricing your products to result in profit? Click here to download our free Pricing for Profit Inspection Guide.

Add Extra Offerings

One of the things that we have found with our clients is to add something “extra.” For example, Company ABC wants to increase their price on widget A from $80 to $150. They don’t have any other products, but they need to increase the prices so that they will be profitable. Instead of losing customers that may not be able to afford the $150, Company ABC splintered their products into three separate items – priced at $47, $56, and $89. Once a customer saw value in those smaller products, they opted-in to purchase the $150 product.

This is also a numbers game. When you provide extra offerings, you are able to capture more market. Hopefully, you will be able to promote those purchasing the cheaper products into a higher price range.

Adjust the Product

While this option isn’t necessarily increasing pricing on products, it is changing the cost structure and improving profitability. This tactic is used frequently in restaurants. Have you ever frequently visited a restaurant and your favorite meal started getting smaller… Yet, you were still paying the same price? Many companies chip away parts of the product to reduce costs, and therefore, increasing the price per plate, ounce, etc.

increasing pricing on products

Occasionally Run Specials

Think of that customer that is very price conscious and sensitive. Every once in a while, offer your products with a discount – essentially bringing it back down to its original price. This is a great way to retain previous customers that were conditioned with their prior expectations. Retailers do this all the time.

Change Your Customer

Increasing pricing on product often brings to light the fact that you have the wrong target audience. For example, one audience is highly sensitive to price due to the currency exchange. While another is less sensitive. Explore what it would look like to focus on that preferred audience. Maybe your specialized expensive item belongs in a specific industry that values your product, and not in a more general industry that maybe does not need or appreciate it.

Do Your Homework

Increasing pricing requires a lot of work on behalf of your marketing, sales, and operations team. If you are increasing pricing on products, are you absolutely sure that you will not have to do it again in the next few months? Because this process is an undertaking, do your homework and research the costs of your product. Will there be anything that could influence your costs?

When is the last time you had a price increase?  You would be surprised how many times we speak to a business and they had gone years without a price increase.  These companies are not evening covering the cost increase attributed to inflation.

Increase Pricing on Intervals

Service companies frequently use this pricing tactic. They increase their pricing after a 6-month or 12-month membership. It’s expected. Sure, you may have customers that work around the system – finding new services, signing under a different name, etc.

Examples of Recent Price Hikes

While we have discussed extensively about Netflix, there are other industries, companies, and areas of the market that are having to adjust to a) the loss of customers, b) the increase of costs, and c) growth.

Movie Theaters or Cinemas

Before the era of streaming networks and DVRs, movie theaters or cinemas were all the rage. That was the only place you were able to watch new releases before you could purchase their respective DVDs. But as we have seen, more potential customers choose to stay home and watch on their home television instead of going out. Maybe this is caused by generational preferences. Regardless, movie theaters are having to increase product to compensate for decreased customers AND add value. Theaters are now offering fully stocked bars and restaurants, reclining chairs (or pods), and creating a high scale environment. iPic Theaters is a great example of how the environment of movie watching is changing.

Price for Profit

Whether you are increasing the prices of your products in the next couple of months or years, it’s important to price them right the first time. Oftentimes, when we work with our clients, we find that their pricing was not resulting in profits. After seeing this so often, we developed a Pricing for Profit Inspection Guide that you can access here for free. Download the free Pricing for Profit Inspection Guide to learn how to price profitably.

increasing pricing on products

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Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

increasing pricing on products

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Demystifying the 80/20 Rule

Whether you are working with a client, putting together a reporting package, networking with potential theory, or closing the books, there’s a rule you can apply to make your life easier. This rule is probably one that you’re very familiar with – regardless of whether you practice it. When you are completing a job, there always seems to be a few things that push the needle further than anything else. This is the 80/20 rule.

Using the 80/20 rule is a great way to be a more effective financial leader. Click here to read more about how you can be a highly effective CFO.

What is the 80/20 Rule?

Simply put, the 80/20 rule is where 20% of the work results in 80% of the outcome. Likewise, 80% of the work only results in 20% of the outcome. While the numbers may not be spot on, the theory holds true in pretty much everything you do.

In the early 20th century, Vilfredo Pareto, an Italian economist, introduced this concept to explain the distribution of wealth in his home country – Italy. It first came about when roughly 20% of his pea pods made 80% of the total number of peas grown. As he continued to test this theory, he expanded it into other areas of macroeconomics (wealth distribution). Then roughly 30 years later, Joseph Juran applied the 80/20 rule to business production methods. He explained this rule “the vital few and the trivial many.”

Demystifying the 80/20 Rule

Many may argue that it’s not exactly 80/20, and you would be correct. It may even be 99/1 if you look at a particular situation. But as we demystify the 80/20 rule, we need to be thinking from a macro viewpoint. What is the minimal amount of work you can do to result in the most work.

How It Applies to Financial Leadership

As the financial leader of your company, it’s so important to know what pushes the proverbial needle forward the most. Look at your team, your fulfillment, your customers, your vendors. Then look at your role in the company. What work can you do that will result in bigger and better outcomes? Identify the work that takes up the most time without providing much. You may consider having a lower level employee work on those tasks. If that 80% work is too sensitive, then restructure your day to allow for the most time sensitive issues to be front and center.

80/20 Rule

Customer vs Revenue Relationship

Because there is no business without its customers, let’s look at the relationship between customers and revenue.

Who are your best customers? They are the ones who pay their invoices on time, don’t require extra time from your team, and never complain. They are also your most profitable customers. These customers are your 20%ers, and they make up 80% of your revenue!

But then, there are those customers who you dread receiving a call from because you know it’s going to be yet another complaint. These unprofitable customers suck your time, resources, and money. They make up 80% of your customer support/implementation/sales. Yet, because they take advantage of you, they only result in 20% of the company’s revenue (and less in profit). If you are overrun by profitable customers, you may want to think about firing that customer.

An effective financial leader is able to guide their CEO through the numbers and demystifying what may be unclear to them. If you want to more effective, click here to download the 7 Habits of Highly Effective CFOs to become a more valuable leader.

Improve Your Productivity by Applying the 80/20 Rule

If you desire for your team to be more productive, then you need to start with yourself. A fish rots from the head down. Start by analyzing your to do list. Are there a few things that will make a big difference? If so, prioritize those over everything else. Remember, not everything on your to do list will have the same impact or risk. A great way to assess the weight of each task is to use “tags” labeled: non-essential, essential, and critical. Are you chasing administrative tasks or completing the same tasks over and over? Ask yourself whether those can be automated or if a less expensive employee can complete them.

Why You Need to Be More Productive

There are so many squirrels that you could chase! There’s a million ideas that are all million-dollar ideas. But what do you need to do to meet your goals? If you continue to get bogged down by things in the 80% pile, then you risk never reaching your or your company’s goals. You need to be more productive, more streamlined. Although many see automation as a risk, we see it as an opportunity to force ourselves to be more productive.

How It Impacts How Effective You Are

When you apply the 80/20 rule to your leadership and workspace, you become more productive. You are then able to see clearly what is going to push the needle further. In our experience, our client’s experience, and our vendor’s experience, there are just a few indicators that hold much more weight. Think about it this way… If you listed everything you need to improve, you would never get it all done. You simply don’t have enough time to do everything! But you do have enough time to focus on the 20% and reap the 80%.

Lead From the 40,000 Foot Level

An effective financial leader leads from the 40,000 foot level. If you only look at an issue 2 inches away, then you are going to miss what’s causing it, what it’s impacting, etc. A good leader needs the entire picture before they make a decision for the company. This also helps you guide your CEO. Click here to download the 7 Habits of Highly Effective CFOs to find out how you can become a valuable financial leader.

80/20 Rule

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80/20 Rule

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7 Ways Your Company Can Be More Like Amazon

As we transition into Quarter 3 of 2017, companies are already planning for what 2018 is going to look like. Over the past year, we have seen a lot of change in the business landscape. Amazon acquired Whole Foods and dramatically sliced prices. Apple released not just one, but two iPhones in the past month. President Trump took office at the beginning of the year. Great Britain voted to Brexit from the European Union. Alfred Angelo, a bridal store giant, filed for bankruptcy. There has been innovation, disruption, uncertainty, destruction, and so much more in the business landscape. One thing that we do know for 2018 is that to survive, you must be innovative. Fast Company has already named Amazon to be the most innovative company in 2017, so let’s learn how your company can be more like Amazon.

7 Ways Your Company Can Be More Like Amazon

Amazon has impacted how businesses must compete in today’s world. Instead of just competing in one market, Amazon now competes against retailers, grocery stores, logistics, technology providers (Apple, Google), and many more industries and markets. After researching how they have grown, especially over the past 5 years, we have created a list of 7 ways your company can be more like Amazon.

1. Experiment

NASA has been around for 59 years. In that time, they went through ample amounts of experiments to get people into space… They tested every aspect of the shuttle, the gear, the computers, the communication, etc. While there were thousands of failures, they were the first to walk on the moon. Likewise, Amazon has used the same theory to experiment in many different fields. Ever heard of Amazon Webstore, Amazon Destinations, WebPay, Askville, and Amazon Auction? These are just a few examples of products that Amazon either shut down completely or morphed them into a product more successful.

Obviously, you may not have the same cash flow as Amazon does. But that doesn’t mean you do not have the capabilities to conduct an experiment. The most important part of experimenting plenty is to change your perspective to innovate. Start by testing variations of your product through A/B testing. Then test everything! Your product, your processes, your departments, your services, your customers, your placement. Everything. Continue to test until you are pleased with the outcome, then test some more. As technology advances and society changes, things will change more rapidly than ever before. These experiments should never stop.

Amazon’s Advice About Experimenting

In Amazon’s 2015 Letter to the Shareholders, Jeff Bezos discuses this concept on experimenting frequently.

Most large organizations embrace the idea of invention, but are not willing to suffer the string of failed experiments necessary to get there. Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten.

We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.

If you are looking to start experimenting, you need to know what external factors could impact the success of your experiment. Download our External Analysis whitepaper to learn more.

2. Expect to Fail

When you begin to experiment, you can expect to fail more than you succeed. Once your company has created a culture of encouraging failure, innovation will begin to happen. Thomas Edison, one of America’s greatest inventors and businessmen, once said, “I have not failed. I’ve just found 10,000 ways that won’t work.” Your company can be like Amazon if the leadership encourages each employee to fail. Although that sounds counterintuitive, this aspect has resulted in Amazon’s massive growth.

As the financial leader of your company, structure the company’s ability to fail. Because you need to protect the financial future, put in some guidelines for each experiment. Check that they are going to improve something that will move the needle. You don’t want your employees to be experimenting on senseless things – wasting both time and resources.

3. Innovate Everything

If your company wants to be more like Amazon, you should innovate everything in your company. Ask even the lowest employee why you do things a certain way. If your team responds, “that’s just the way we’ve always done it,” it is time to innovate. There must be a reason for everything you do, and if there isn’t, then you either need to cut that process out or innovate it.

Check out Amazon’s product listing that can be found at the bottom of their website. Notice how they cater to various customers, needs, and desires. From cloud storage to groceries to comics to videos and movies to publishing, every customer can find at least one product that they can use. When we say to innovate everything, we mean everything. Amazon is continually updating, improving and innovating their systems and products to better serve… Their customers!

your company can be more like amazon

Now, providing various products does not necessarily work for every company – and it shouldn’t. But Amazon has made the web their playground and has innovated everything related to the web. Find your playground and start innovating.

4. Be Customer Centric

One thing that has set apart Amazon from the rest is their customer centric, customer obsessed culture. In a Forbes interview with John Rossman, a previous executive at Amazon, he said that “there are 14 leadership principles at Amazon. They weren’t written down, they weren’t codified when I was there, but you saw them being used every day. The first one is ‘Obsess over the customer,’ and the 14th is ‘Deliver results,’ and there’s 12 in between those two.” To get results, you must start with the customer. A business can have all the best processes, accounting, logistics, etc., but if your company does not have a customer, it doesn’t exist.

Refocus every employee on the customer. What do they want? How quickly can you get what they want to them? What does your customer need? How can we better serve our customer? What needs do they not know aren’t being met? Every decision made in the company should be directed towards the customer. You company can be more like Amazon if you are customer centric. Jeff Bezos once said, “Focusing on the customer makes a company more resilient.”

5. Get Out Of Your Comfort Zone

Change for some can be uncomfortable. Even those that thrive on that adrenaline pumping adventure, some change can feel like walking on a tight rope across a canyon. Get out of your comfort zone when you are innovating. Just because you are in the financial leg of your company doesn’t mean you need to stay there all the time. For a company to be effective, every employee needs to be involved in every aspect of your company. For example, you should be concerned how marketing is spending their budget. Marketing, likewise, should be wary of how their decisions impact the bottom line.

6. Base Strategy on Reliable Facts

Your company can be more like Amazon if you base your strategy on reliable facts. While this seems like a simple task, many companies base their strategy on what they want to outcome to be… Not on fact.  At re:Invent 2012, Jeff Bezos elaborated on why you need to base strategy on reliable facts.

“I very frequently get the question: ‘what’s going to change in the next 10 years?’ And that is a very interesting question; it’s a very common one. I almost never get the question: ‘what’s not going to change in the next 10 years?’ And I submit to you that that second question is actually the more important of the two – because you can build a business strategy around the things that are stable in time….in our retail business, we know that customers want low prices and I know that’s going to be true 10 years from now. They want fast delivery, they want vast selection.

It’s impossible to imagine a future 10 years from now where a company comes up and says, ‘Jeff I love Amazon, I just wish the prices were a little higher [or] I love Amazon, I just wish you’d deliver a little more slowly.’ Impossible [to imagine that future]… When you have something that you know is true, even over the long-term, you can afford to put a lot of energy into it.

For your company to be successful, you need to start identifying what is going to be true ten years from now. They are going to want a better product or service. Your customers want to get that for a lower price. And they want value.  Once you write down the facts, you can strategize your company’s next move.

7. Remove Any Risks

Obviously, we are not going to recommend that you innovate or experiment without having thought it through. In fact, you need to prepare before you begin the experiment. Remove any known risks associated with that experiment and be aware of any potential risks that could come about. Create an External Analysis to overcome any obstacles that come your way and be prepared to react to those external factors. Although you may not be able to prevent those obstacles from occurring, you can prepare how you are going to react to them. Download our free External Analysis whitepaper to gear up your business for change and your company can be more like Amazon.

your company can be more like amazon

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

your company can be more like amazon

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If It’s Always On Sale, Is It Ever On Sale?

When you walk into a shopping mall, what do you see? I see sale signs everywhere! How could a company ever make money if its products or services are always on sale? 50% off, buy 1 get 1 free, 70%… It never ends.always on sale

Have you wondered if it’s always on sale, is it ever on sale?

Marketing in Action

Organizations such as Checkbook.org compare the regular price, lowest sales prices, etc. to the public. This non-profit organization has studied companies (especially in retail) to shed light to how those businesses are always advertising sales.

Truth is, we’re all suckers for a good sale. The way marketing works is that they tap into expressing a higher value for a product for a cheaper price. AND it works! If you see a shirt that’s on sale for $15, having been marked down from $45, you’d probably think that’s a great deal. You’re a winner. But what if I told you that that shirt, priced at $45, was produced at $5? At that cost, you’re looking at a 200% profit margin for one T-shirt on sale. And you’re going to buy it because you didn’t have to spend $45. They made you feel that you’re getting a valuable deal. And the next day, this particular store takes 10% more off, giving you an 80% sale.

If It’s Always On Sale, Is It Ever On Sale?

Now, this example might be a bit extreme. But if something is always on sale, is it ever on sale? This type of selling has been known to be very profitable and effective. Consumers believe that they are getting a good deal on a product or service if the percentage off is high (20-80%).

Bucking the Trend

One company decided not to be “always on sale“… with disastrous results. After the 2008 recession, JC Penney’s new CEO, Ron Johnson, made some radical changes in how the company was going to move forward. The company was struggling to find its identity in the competitive world of middle market retail.  Johnson decided that rather than their usual practice of offering an item for $100 only to mark it down to $50 a few weeks later, the store would offer no discounts but would price all its items at what it called “Fair and Square Everyday Pricing”.  The everyday low prices strategy offered the product for less than the initial $100 offer, but slightly more than the $50 sale price.

The problem?  JC Penney’s customers had grown accustomed to discounts and sales prices and went elsewhere when none were offered.  The store’s efforts to attract new customers with it’s simpler pricing policy were a failure as well resulting in decreased sales to the tune of $1 billion.

Want to learn how to price for profit while still catering to your customer’s needs? Click here to download our free Pricing for Profit Inspection Guide!

Pricing could be seen as a form of psychology. People are willing to spend up to a certain point on a product. Johnson failed to see the psychology behind pricing and completely disregarded his customers.

Know Your Customer

This is Marketing 101. Know who your target customer is. What’s the easiest route to obtain and hold on to that customer? Look at marketing’s 5 C’s: customers, company, competitors, collaborators, and context.

  • Are you addressing your customers’ needs?
  • What are the limits of what your company can do to fulfill a customer’s needs?
  • What are your competitors doing?
  • Is there a business that through collaboration could reduce your cost of goods and overhead?
  • What’s going on in the world that’s impacting your business?

JC Penney wasn’t addressing its customers’ needs; therefore, the company lost much of its customer base. The company was also implementing new products and services within the store. Because they didn’t have the capital to execute, JC Penney had to seek additional capital to implement the plan. Competitors  were selling at a lower cost with higher quality material. JC Penney’s customers began flooding to those competitors.

Shipping through Amazon, hiring temporary staff, and so many other strategies could have been implemented through collaboration with another company. JC Penney was implementing a completely new business strategy after the 2008 recession when consumers couldn’t really afford to spend a lot on new clothes.

Target Your Customer

This is your playing field. Focus only on this customer base. Your marketing department is most likely enthusiastic to reach every type of customer through one product. It’s better if you sell to 90% of 100 people than 30% of 300. Why? If you’re only focused on that niche market, then those customers are going to be more loyal to a company that is solely focused on their needs.

Whole Foods and Walmart do an excellent job of targeting their customer. Whole Foods caters to the middle to upper class that desire healthy, organic foods. Their target customer is willing to pay a premium price in order to get a quality product. Whole Foods doesn’t try to target Walmart’s target customer. Walmart caters to low to middle income people who aren’t particularly concerned with the quality of a product, but are looking for the best price. If Walmart were to start selling premium products for a Whole Foods price, Walmart’s customer might be hesitant to continue shopping there for fear that all prices might increase.

If you’re like JC Penney targeting middle-class families, your prices should match what your target customer would be willing to pay for a product or service. JC Penney failed to target their customer because they were only looking at their bottom line.

Price for Profit

If your company is constantly having a sale, are you actually making a profit? It is imperative that you examine your results to monitor if these sales are working and how they are impacting your bottom line.

You should be able to price at a point where you would be profitable. Oftentimes, we analyze the revenue, the big flashy sale signs, and how well the sale is doing. But what if you hosted a sale that didn’t allow for you to make a profit?

Looking for how to price for profit?  Click here to download our free Pricing for Profit Inspection Guide!

Regardless of whether your company is hosting a 20% off, a BOGO, or an 80% off sale, you can still price your products to give you the return you need. JC Penney did a number of things wrong in addition to missing their target customer, but in the end it led to the firing of the CEO and a lengthy recovery period that some still say they aren’t quite through. They didn’t price for their target customer or price at a point that would return a profit.

To make sure that you’re setting your prices at a profitable level, check out our Pricing for Profit Inspection Guide here.

always on sale

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3 Benefits of an Analysis of Customer Profitability

analysis of customer profitability

Over time weeds grow in any garden. In the same way, unprofitable customers work their way into your company. To avoid the high costs of low profit customers, you should perform an annual analysis of customer profitability. Therefore, weed your garden of customers who are sapping your profits and cash flow.

Although there are many ways to look at your customer base, some of the factors to consider are sales volume, gross margin, profitability, number of transactions, and average sale per transaction. Looking at this information will not only shed light on those customers who are a drain on company resources, but highlight opportunities to sell more to higher margin customers who have low activity.

Analysis of Customer Profitability Benefits

1.  The elimination of customers that are costing you money.

Sometimes the costs may be indirect. Firing the customers with low gross margins is straightforward, but what about the customers that pay a good gross margin but require a lot of effort from operations? Not only do you need to address gross margin but you need to consider the costs to service that customer.

2.  Focus!

If you get rid of the clients that are high maintenance, then it frees your organization up to focus on the more profitable customers. While a successful strategy might be to cross sell additional products or services to those clients who value the relationship, another strategy would be to target new customers with the same characteristics as the good clients you have today.

3.  Increased Productivity Across the Organization

The benefits of weeding out high-maintenance, low profit customers will reach across the organization.  The sales department benefits by focusing their prospecting on the right clients who value and will pay for the company’s products and services. Operations and finance will realize improved productivity in servicing only those customers who are reasonable in their demands for service.  No more getting beaten up on margins, “special” payment terms, or Friday afternoon rush jobs!

The bottom line is the advantage of customer profitability analysis is improved profitability and cash flow! The two ingredients necessary to grow a company faster.

Learn how to apply concepts like this in your career with CFO Coaching.  Learn More

Your CEO needs to understand each customer’s profitability and for you to be their trusted advisor. Click here to learn how you can be the best wingman with our free How to be a Wingman guide!

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Trade Credit

See Also:
5 Cs of Credit
Credit Sales
Standard Chart of Accounts
Income Statement
Free Cash Flow

Trade Credit Definition

The trade credit definition refers to postponing payment for goods or services received. Another trade credit definition is buying goods on credit, or extending credit to customers. It is also receiving goods now and paying for them later. And trade credit is delivering goods to a customer now and agreeing to receive payment for those goods at a later date. Trade credit terms often require payment within one month of the invoice date, but may also be for longer periods. Most of the commercial transactions between businesses involve trade credit. This type of credit facilitates business to business transactions and is a vital component of any commercial industry.

If a consumer receives goods now and agrees to pay for them later, then the consumer purchased the goods with trade credit. Likewise, if a supplier delivers goods now and agrees to receive payment later, then the sale was made with trade credit. There are two types of trade credit: trade receivables and trade payables. Trade credit payables and receivables can become complex. It is important to manage trade credit properly and accurately.


Download The 25 Ways to Improve Cash Flow


Accounting Trade Credit

For accounting trade credit, the value of goods bought on credit is recorded on the balance sheet in an account called accounts payable, representing money the company owes for goods it already received. These are trade payables.

While the value of goods sold on credit is recorded on the balance sheet in an account called accounts receivable, representing the money owed to a company for goods it already delivered to customers. These are trade receivables.

Trade credit is essentially a short-term indirect loan. When a supplier delivers goods to a buyer and agrees to accept payment later, the supplier is essentially financing the purchase for the buyer. Trade credit is an interest-free loan. As long as the buyer postpones payment, the buyer is saving the money that would have been spent on interest to finance the purchase with a loan. At the same time, the supplier is losing the interest it would have earned had it received the payment and invested the cash. Therefore, the buyer wants to postpone payment as long as possible and the supplier wants to collect payment as soon as possible. That is why suppliers often offer discount credit terms to buyers who pay sooner rather than later.

Trade Receivables Definition

Trade receivables represent the money owed but not yet paid to a company for goods or services already delivered or provided to the customer. The goods were delivered. Then the company recorded the sale. But the cash was not yet received. Record trade receivables as an asset on the balance sheet in an account called accounts receivable.

Trade Payables Definition

Trade payables represent the money a company owes but has not yet paid for goods or services that have already been delivered or provided from a supplier. The goods were received, the expense was recorded, but the cash was not yet paid. Trade payables are recorded as a liability on the balance sheet in an account called accounts payable.

For more tips on how to improve cash flow, click here to access our 25 Ways to Improve Cash Flow whitepaper.

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