To improve profits, you must build and coach a team across multiple facets of your company. You need players from all parts of the company: engineering, operations, sales, marketing, and finance. Only together can you commit and engage to improve the customer experience, products, and processes that go into making more money for your company. Read on to learn how to make the most of these areas with a three-phase approach to improving profits.
Profit improvement is a team sport
Almost every function in a company has a role. Unlike in most competitive sports, there is no starting five or first-string or second-string players when it comes to improving profits.
The secret to building profit is engagement across internal cross-functional teams and customers. Senior leadership has to bring the disciplines together, set targets, and establish real, measurable goals for each.
Applying the empirical and age-proven Pareto Principle, aka the 80/20 rule, can help you achieve profit improvement in three phases: customer rationalization, product rationalization, and process improvement. When applied to profits, the 80/20 rule states that 80% of a company’s profits come from 20% of its customers.
Working together as a cross-functional team, you can improve margins in both customer segments by changing how you do business with each side. Think of it as scouting a team to customize your game plan. By segmenting both the 20% and the 80% into distinct strategies, you can improve profits.
Phase 1: Customer rationalization
In the first phase, the focus is on getting low-margin/low-volume customers to move to standard products — or to raise prices. This touches mostly finance, product management, pricing, marketing, and sales.
If 80% of your customers are contributing only 20% of your profits, chances are you’re focusing on the wrong products. These are products that offer low margins and high costs associated with support and maintenance.
Phase 1 comes down to two questions: Can you eliminate these low-margin, high-cost products and move customers to something else? Or do you get rid of the customers altogether?
Ford is a great example of a company that took this approach. When faced with the prospect of retaining customers with low-margin economy cars and lower sales volumes, the company decided to eliminate its line of budget sedans and place more focus on its large crossovers, SUVs, and trucks — where profit and demand were the greatest.
Phase 2: Product rationalization
In the second phase, the engineering, procurement, and product management departments are heavily involved in standardizing components and reducing the number of suppliers. Companies that have been around for longer periods — 10 or 20 years or more — usually develop a bloated product portfolio that eats into their profits.
It’s human nature to want to provide a variety of products and features. And salespeople are all too happy to offer these varied products as a means of attracting and keeping customers. In the process, duplicate components, vendor contracts, and support for those products can cost more money than they’re worth.
Sometimes it’s good to do a little spring cleaning and discard the products and services that weigh down your employees and profits. Bring in engineering, procurement, and product management for an 80/20 audit — known as managing the long tail — on vendors, clients, processes, and products to cut some of your losses.
Phase 3: Process improvement
The third phase relies on the operations and sales teams to make sure low-margin products and customization requests by customers don’t creep back in. This includes looking at customers, products, and processes across the company’s entire product portfolio.
Take an 80/20 review of every business unit to determine gross margins and true profitability for every product and customer in the portfolio. Review your procurement processes to understand similarities among products and components, and then devise a strategy to reuse and standardize parts and materials.
Once you’ve tackled all three phases as a team, you can expect new profits and sustainable business to carry your company through a winning season.
If you’ve been struggling to improve profits, AlignAlytics can help you draw out a game plan that engages your employees and customers for a whole new winning strategy. Reach out to me below or or follow the author link.
Author: Patrick Mosimann