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Identifying Profitable Customers

identifying profitable customersIdentifying profitable customers is essential to a business’s success. Often I hear from financial leaders… “I don’t need to worry about the customers; that’s the marketing and sales team’s job.” WRONG. Everyone in your company should be concerned with your customers because without them, there is no business.

If it turns out that most of your customers are unprofitable, you have a problem. The two most effective ways to address unprofitable customers is by either cutting costs or raising prices.

There’s an easy way to do both, but you can only find the detailed plan in our Pricing for Profit Inspection Guide. Download this guide for free by clicking here.

Why Identify Your Most Profitable Customers?

So why should you focus on identifying profitable customers? If you are in charge of managing profits and cash flow, you must know your customers. Truth is, not all customers are created equal.

identifying profitable customersEver heard of the 80/20 rule? Typically, it is used in reference to productivity. But the reason why you need to identify your most profitable customers is because often, 20% of your customer base makes up 80% of your profit.

There are several things that you need to ask yourself when identifying profitable customers…

  • What is your customer segmentation by channel?
  • Who are your least profitable customers?
  • What products are being bought by most profitable customers?
  • What product most often purchased?
  • Which are your most profitable products?
  • What services are utilized by profitable customers?
  • What are the costs (tangible and intangible) associated with profitable customers? Unprofitable customers?

What do you do with the unprofitable customers?

Some indicators that a particular customer is likely unprofitable are abusive behavior to your sales and support team, general aggravation, seeking undeserved credits, requiring more time than the typical customer, and not completing tasks to move along project. Although there are more indicators, this list gives you an idea of what to look for to identify your unprofitable customers.

How to Identify Profitable Customers

An example… in working with one of our clients, we discovered that people ages 45-65 were their most profitable customers based upon the length of time they subscribed to their product. On average, those in that age category subscribed for 14 months. Whereas, those under the age of 45 only subscribed for 3 months. When we worked with our client to calculate cost to acquire each customer and the lifetime value, we were able to make an educated decision to invest in those ages 45-65.

Now that we have identified our client’s most profitable customers, our client puts a large portion of marketing funds to the ages 45-65. A customer outside of that target market is still a viable customer, they just don’t get as much marketing attention the since they are not their primary and most profitable customer segment.

Service Companies

For example, in the service side of our company, we monitor the costs associated with that particular client. If we find that we are spending more than we are making, there are two things that we need to do: figure out why the costs are so high and calculate whether we need to charge more. By knowing our unit economics, we are able to quickly judge whether a client is profitable or not.

If your costs are too high for what you are charging, it’s time to price for profit. Download our free Pricing for Profit Inspection Guide to easily discover if your company has a pricing problem and fix it!

Product Companies

Typically, a product is sold at one price point. Because of that, some companies may fail to look at the profitability of their customers. As we have worked in multiple industries, we have found that there are several areas to look at to improve profitability, including the following:

  • Customer Base
  • # of Products Purchased
  • Demographics
  • Lifetime Value of Customers
  • Channels

By using these areas, our clients have been able to shift their focus on their profitable customer base (and lookalike audiences) and consequently increase the number of products purchased per customer, decrease refunds, and increase the lifetime value of a customer. Sounds a little bit like marketing, right? But as a financial leader, you must operate in sales, marketing and operations to effectively lead the company forward financially.

identifying profitable customersNurture Profitable Customers

If you’re identifying profitable customers, you might see how the company can nurture its most profitable customers. What does your support department do differently with the favorite customers versus those that ruin their day? Partner with your sales and support teams to address how to better nurture them.

How to Deal With Unprofitable Customers

Because there is a limited amount of time in the day, deal with your unprofitable customers and set up procedures to address them to ensure economic success.

Don’t Focus On Them

If you keep giving five star service to those that abuse it and continue to demand or expect excellence, you are going to experience increased costs (and frustration from your service team) associated with servicing that customer. Remove the focus from them.

How would you go about doing this? Encourage your front line employees to provide limited attention. Sure, some customers will leave. But in all reality, you don’t want to keep those customers AND it’s easier than you having to fire them.

Set Boundaries

In the case that you have a client who abuses the kindness of your front line employees, you need to call a meeting to address those behaviors AND set boundaries between the customer and the company. If you’ve been in business long enough, think of that client who did all of the following things:

  • Demanded too much time
  • Didn’t do what they were told
  • Expected more than they were willing to pay for

How is this a financial leader’s role? Make employees feel like it’s okay to do so, and they won’t be punished for impacting the financial success of a company. Show your team the economics, and give them the power to push back against those unprofitable customers.

Increase the Price for a Service

Price is often one of the largest deciding factors for a prospective customer when deciding which firm they want to work with. It would only make sense that to make up for the hassle factor of unprofitable customers, you need to increase the price you are charging for your service. Chances are, if you find them difficult to deal with, your competitors do too and have adjusted their prices accordingly.  To learn how to price for profit, download our Pricing for Profit Inspection Guide.

identifying profitable customers

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identifying profitable customers

Key Elements When Seeking Financing

key elements when seeking financing

This past week, one of my clients met with a banker to develop a new banking relationship. He hands the banker the company’s financial statements, expecting the banker to look at the income statement. Instead, the banker flips to the back of the financial statements to look over the balance sheet. As the coach, I asked my client, “See what he just did?” Most financial leaders (and the owners of their businesses) are consumed with their income statement but the banks want to know are more interested in how leveraged their banking client is. Not surprisingly, there are a few key elements when seeking financing for companies to follow.

Key Elements When Seeking Financing

Every company cycles through good and bad times. Depending on what part of the cycle your company is currently in, your banking relationship may be influenced. There are some key elements when seeking financing that will keep you on the good side of your banker.
Identifying your KPIs is a critical piece of the process when seeking financing. Want to find your KPIs and learn how to track them? Access your free KPI Discovery Cheatsheet today!

Leverage

What is leverage? Financial leverage is the use of borrowing from the bank to offset the cost of sales. Many companies hope to borrow just enough to increase their capabilities to sell more. But if banks see that you are too highly-leveraged, it’s bad news!

As a key element when seeking financing, leverage is important to have as it provides credibility to your borrowing experience. A banker will see that you have maximized the potential of previous capital to increase sales. The “kicker” here is if you have failed to optimize the borrowed capital potential, then the bank is going to be more prone to backing out of (or not starting in the first place) a banking relationship with you.

Cash Flow

We say it often and we say it loud… Cash is king. Without cash and/or liquid assets in your company, the bank is going to turn its nose up at you. Be sure to communicate the availability of cash in your company. For example, if a friend asked you for $250,000 but had no way of paying you back, you would be wary and decline the ask. This is because there is no hope that you will get the money back that you loaned. The bank acts in its best interest.

Make it easy for the bank to make a decision. Communicate through the financial statements (especially the balance sheet) the availability of cash.

Not About Price

Oftentimes, business leaders think that the bank cares about the price of your product. They don’t. To the bank, price is the least important factor in their assessment of your company because money is a commodity to them. Price is immaterial.

When meeting with a banker, communicate the bottom line and what’s on the financial statements NOT how you price your product. The bank is not your business consultant. They have to make money off of you.

Creating a Banking Relationship

When seeking financing, it is essential to create a banking relationship. You wouldn’t get married to the person you passed by on the sidewalk, so why would you get into a banking relationship with someone you have zero connection with. There are a few things that you need to look for to have a successful banking relationship.

What to Look For

If you are just starting out in a new city or have no relationships with any bankers, one of the first things that you can do is connect with people that do! For example, as a consultant, I have multiple relationships with various banks. When one of my clients needs a banker, I make the connection. People love feeling like they have it all, so give them the benefit and ask for help.
key elements when seeking financingLook at the bank for their philosophy and how they take care for their customers. In addition to philosophy, look at their morals.
Some questions to ask your banker in the “dating” stage include:
  • How long is a typical relationship with your customers?
  • What are the communication boundaries?
  • What is the bank’s view of breaking debt covenants?

Relationship or Transaction

Another important question you need to ask yourself is: “is this bank looking for a relationship or a transaction?” If you answer the latter, then you are just commission to them. When times are rough, you’re going to get cut. But if the answer is a relationship, then you’re looking at a long healthy marriage.

Relationships are absolutely critical in business. Value these relationships and take care of people. It will reflect in your business.

How does the bank deal in times of crisis?

A few years ago, I had a client that went through a period of stress. In the last quarter of their fiscal year, the business was growing and was doing well. They had 4 quarters of decline, but had tracked their KPIs. Although they had broken a few debt covenants, they were tracking their progress carefully with the bank. This client had a strong relationship with their bank. Without that relationship, the bank would have taken my client to the “workout” group.
Don’t have KPIs to help your banking relationship? Learn how to identify your KPIs and how to track them with our free KPI Discovery Cheatsheet. Click here to download your cheatsheet!
When you stub your toe, how does your bank react? Are they willing to let you slide on debt covenants for a few quarters as long as you have a plan to get out of the downturn? Often, people don’t see the importance of knowing how your bank is going to react in times of crisis. The economy continually ebbs and flows, changing for good or for bad.
Also, how does the bank deal with growth? You need more financing, but you are breaking covenants. Are they willing to provide financing with the knowledge that things won’t pick up immediately?

 The Workout Group

Several years ago, the bank wanted to meet with another of my clients because they had broken their debt covenants. The client calls me after meeting with “great news”! He said that the Bank had offered to work out his problems in the workout group. This “workout” group isn’t to work out your problems and put you back on track. It’s to work you out of the bank. This is not a good thing.
You don’t think your house will ever burn down, but what happens if your house does burn down? You don’t think you need a bank to weather the storm, but what happens when you need the bank to weather the storm with you? Assess whether or not your current banking relationship will be your insurance in the case of a fire or storm.
One way to do this is to look at the bank’s philosophy of business and their internal culture. How tight are they with the rules? Are they willing to stretch a little on their debt covenants and step up to help in times of distress? My client’s bank was unwilling to stretch its debt covenants. Instead the bank just wanted to wipe their hands clean of my client and move on to the next sale.
This willingness to be flexible all boils down to relationships. I have to warn you though, not every bank is similar in their goals.

key elements when seeking financingGet in Line

To prevent being put into the “workout” group, it’s crucial to start out on the same page. Get an alignment of interests, philosophies, culture, and anything else that would impact your company.

Interest and Philosophies

If the bank is only interested in their bottom line, then it may not be a good fit. If the bank is truly invested in your company and is willing to help you out in any reasonable way, then it’s a perfect match.

As I’ve built The Strategic CFO, it’s been a priority of mine to create relationships with bankers as they are going to reap the benefits of my clients doing business with them and I value their expertise. As a result of our mutual interests, the bankers in my network continually push potential clients towards my consulting practice. Those bankers and I have a strong relationship where we understand each others’ needs and desires as well as feed each other.
Of course though, I have had bankers tried to take advantage of my generosity and not return the favor. As a result, those relationships did not last long. It’s all about getting ones’ interests and philosophies in line.

KPIs That Influence Debt Covenants

Banks monitor your debt covenants. To help them (and you) out, identify KPIs that influence debt covenants to help track where you are and where you’re going. Picture this, your significant other or spouse comes home and lets you know that they’ve purchased a house, car, and boat without ever discussing it with you before. If you’re like me, I’d be surprised and would want to control the situation. If your significant other continues to make extravagant purchases or decisions without your prior knowledge, you would have trust issues and may want to cut up their credit card while they’re sleeping.
People see banking relationships as far-off and a different type of relationship. But the truth is, it’s all the same. Relationships are relationships. If you or your company or your significant other continues to create negative surprises, it’s not going to help with the relationship.
First, fix the problem before it becomes an issue. As soon as you see a yellow flag, jump on it!
Then after you fix it, let your bank know what has happened and how it has been resolved. This not only comforts the bank but builds trust. If the yellow flag starts turning red, alert the bank and outline the consequences. This helps you prepare and for the bank to prepare. Procrastinating this step can result in devastating consequences. The bank may be able to help you if you give them enough time.
Start identifying and tracking those KPIs that influence your debt covenants. For help and tips on how we measure KPIs, download our KPI Discovery Cheatsheet today! Know your numbers and where your company is the weakest so that you can start turning around your future.

key elements when seeking financing

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Key Elements When Seeking Financing

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Reverse Stock Split

See Also:
Common Stock Definition
Intrinsic Value – Stock Options
Stock Options Basics
Treasury Stock (Repurchased Shares)

Reverse Stock Split

A reverse split is a procedure that is the exact opposite of a stock split. It involves reducing the number of shares for the corporation while maintaining the same market value. However, the cost per share will be worth more in the market after a reverse stock split occurs.

Reverse Stock Split Meaning

A reverse stock split is usually performed by companies that are going through some financial difficulty and their price may be too low. Some exchanges require that a company maintain a certain price per share to be listed. For example, the U.S. exchanges require a stock price to be above $1 to be listed. If a company’s stock price were approaching this $1 then the company might perform a reverse split to try and up the price per share and keep the company listed.

Reverse Stock Split Example

Blokbusta Inc. has been a declining business the past couple of years. It’s stock price has steadily declined from the $20 Per share two years ago, and prospects for the company are not looking favorable. The current price per share has dropped to $2 per share. To be listed on the exchange that it is currently on the price per share must be listed at least $1. Worried that Blokbusta might fall below the $1 mark before it can turn around the company, Blokbusta performs a reverse split of 10 to 1. There are currently 100,000 shares outstanding. What is the new stock price?

The current market value of the stock is $200,000 (100,000 shrs. * $2/shr.)

The new amount of shares will be 10,000 (100,000/10)

Thus the new price per share will be $20 per share ($200,000/10,000 shrs.)

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reverse stock split

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reverse stock split

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Markup Definition

See Also:
Retail Markup Example
Margin vs Markup
Buyer Bargaining Power (one of Porter’s Five Forces)
Supplier Power (one of Porter’s Five Forces)
Marking-to-Market
Free Cash Flow Analysis

Retail Markup Definition

Retail markup is the difference between the price of a product and the cost of that product. Retail markup percentage is the retail markup as a percentage of a product’s unit cost. This method is commonly used to find the price of retail products which are somewhat of a commodity. Costs are fixed, and the market dictates purchasing price. Furthermore, many industries have a standard retail markup percentage which most products are sold at.

The retail markup definition is common to many products, services, and industries. Where retail sales are occurring, it is likely that someone used the retail markup calculator. It is important to note that retail markup, margin, and other comparisons of cost of goods sold and price are not the same.

(NOTE: Want the Pricing for Profit Inspection Guide? It walks you through a step-by-step guide to maximizing your profits on each side. Get it here!)

Retail Markup Formula

To find the retail Markup amount in dollars: Retail Markup = Sales price – Cost

To find the retail Markup percentage: Retail Markup = Markup amount / Retail Price

Retail Markup Calculation

For example, if a product’s unit cost is $10 and its retail price is $15, then the retail markup is $5:

Retail markup = Retail price – Unit cost = $15 – $10 = $5

and the retail markup percentage is 50%:

Retail markup percentage = (Retail markup/Unit cost) = ($5/$10) = 50%.

To learn how to price for profit, download our Pricing for Profit Inspection Guide.

Markup Definition

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Markup Definition

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Price to Sales Ratio Analysis

See Also:
Price Earnings Ratio
Price to Book Value Ratio
Financial Ratios

Price to Sales Ratio Analysis Definition

Price to sales ratio (PSR ratio) indicates how much investor paid for a share compared to the sales a company generated per share. It measures the value placed on sales by the market. A higher ratio means that the market is willing to pay for each dollar of annual sales. In general, the lower the P/S, the better the value is. However, the value of the ratio varies across industries. A better benchmark is to compare with industry average.

(NOTE: Want the Pricing for Profit Inspection Guide? It walks you through a step-by-step process to maximizing your profits on each sale. Get it here!)

Price to Sales Ratio Formula

Price to sales ratio = Market price per share ÷ Sales per share

Or = Market Cap ÷ total sales

Price to Sales Ratio Calculation

Example: assume $20 in market price per share and $5 in sales per share.

Price to sales ratio = 20 / 5 = 4

This means that investors pay $4 for every dollar of sales that a company generates.

Applications

Price to sales ratio values a stock relative to its historical performance, market competitors or general market. In general, a low price to sales ratio means a good investment because investors are paying less for each unit of sales. However, price to sales sometimes provide very limited information because it does not take into account any expenses or debt and a company with high sales maybe unprofitable.

Resources

For statistical information about industry financial ratios, please click the following website: www.bizstats.com and www.valueline.com.

To learn how to price for profit, download our Pricing for Profit Inspection Guide.

Price to Sales Ratio Analysis

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Price to Sales Ratio Analysis

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Over the Counter Bulletin Board (OTCBB)

Over the Counter Bulletin Board (OTCBB) Definition

The Over the Counter Bulletin Board or OTCBB is an electronic quotation system used for smaller stocks that do not meet the credentials to be listed on the NASDAQ or National Securities Exchange.

Over the Counter Bulletin Board (OTCBB) Explained

The OTCBB is a market for smaller companies that do not meet the market capitalization, minimum stock price, or other requirements needed to be listed on the larger exchanges. Because of the low share prices, the stocks are often referred to as OTCBB penny stocks. The only requirement of the OTCBB listing requirements are that a company has to have audited financials following the requirements set forth by the SEC. However, OTCBB pink sheets are listings that do not have the proper SEC filings. Because they are not filing to the SEC, pink sheets are often more risky than the other stocks listed on the Over the Counter Bulletin Board.

Over the Counter Bulletin Board (OTCBB) Example

For example, Wawadoo Inc. is a startup company that manufactures widgets for the market. Although it is a small company right now, management believes that the company has great growth potential. Management believes they can list it on the NASDAQ eventually; however, it does not meet the requirements for now. As a result, Wawadoo has decided to go ahead and list itself on the OTCBB to establish the company in the market. As it grows, they will move into the larger exchanges.

Over the Counter Bulletin Board

See Also:
Employee Stock Ownership Plan (ESOP)
Return on Common Equity (ROCE)
Treasury Stock (Repurchased Shares)
Common Stock
Return on Equity Analysis

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Mixed Economy

See Also:
Economic Order Quantity (EOQ)
Economic Production Run (EPR)
Accounting Income vs. Economic Income
Feasibility Study
Economic Value Added

Mixed Economy Definition

The mixed economy definition is an economy where both the private market and the government control the factors of production. It is the most common form of economy that exists in the world today. All of the major developed and developing nations are a mixed economy, as well as many of the smaller developed and developing nations. This is due to the fact that a completely capitalist economy, for example, has never existed. The term mixed economy is another name for dual economy.

Mixed Economy Explanation

A mixed economy is an economy which has government restrictions on some but not all of the economic factors. As a result, it is an important term in macroeconomics. This is because mixed economy countries are the most prevalent in the world.

In our mixed economy, United States government controls infrastructure, social services, and other factors. Outside of this, industries in the United States are more of a market economy, where goods and services are provided based on demand and price. Laws placed on them restrict the markets.

In the mixed economy system outside of the US, government decides what is best controlled by the free market. In situations believed to need outside assistance, government steps in to control industries with regulations or total state monopoly. Using the USA as another example, the energy industry was once a state monopoly. This restriction has since been lifted and competition has driven the price of energy down.

Pros and Cons

Mixed economy pros and cons differ from person to person. Some believe that government needs to control factors to avoid corruption and exorbitant prices on basic necessities. Whereas, others believe that the free market is the only method which moves fast enough to deal with the changes of consumers. The truth lies, surely, somewhere in between. Many economists argue that advantages are best utilized by using the government as a temporary solution, allowing the free market to make long term decisions.

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Mixed Economy

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Mixed Economy

 

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