By Jill J. Johnson, president
Johnson Consulting Services
Few enterprises truly understand the actual profits generated by the individual sales they make. Most metrics for sales effectiveness are monitored by reviewing top-line revenue results. Yet, the most critical determinant of ongoing business viability is understanding what revenue actually drops to the bottom line after all costs have been taken into account. You must understand what profit is generated by sales to each of your clients. Then consider the benefits and vulnerabilities the cumulative impact these sales mean to your business.
Each sale has multiple components impacting its final profit. You should consider your total cost of goods sold, including investments in promotion and delivery expenses. Factoring in the costs associated with the staff time required to generate a sale is a must, too. Unfortunately, few companies consider all these expenses when developing their marketing and sales strategies.
Frankly, not all clients are worth the effort to generate the sale. Sometimes your business growth goals mean you also are growing beyond clients you have historically served. This transition period is a vulnerable point for any enterprise. It also is very stressful because you might wind up losing a client that could have provided greater revenue value if you had not been afraid to maximize your relationship.
Study the costs associated with serving each client – especially if you have long-term clients you like personally. If you have not taken the time to explore the costs of the sale, their value to your business may have changed dramatically over the years. Before abandoning these clients, try to identify options to trim your expenses without jeopardizing quality. But, it may be time to move on if they are not generating any real profit to your company.
There are two ways of looking at sales profitability data: by the individual clients or by combining clients using some specific target marketing components. Grouping clients by similar characteristics – such as industry sector, number of employees, location, etc. – makes it easier to identify trends in the data used to assess the profitability of each of these major segments.
If Client Segment A generates solid profits for you, but all sales efforts are being devoted to Client Segment B – which is barely breakeven – the choice is obvious. Retool your sales activity to attract more prospects from Client Segment A. Focus your sales activities and expenditures toward those type of customers who can best be served by your enterprise, who will stay with you over the long-term and who will generate solid profitability.
A complete review of the mix of your customers and sources of sales will reveal potential vulnerabilities if market conditions change. It is not enough in today’s competitive marketplace to look only at total overall sales. If one customer generates more than one-third of your sales, you are in an extremely vulnerable position if you lose that client to a merger, change of staff or if it goes out of business. Controlling and monitoring your client profitability and cost of sales allows you to take corrective action before your business’s survival is at risk.
A close companion to client profitability is understanding the impact of various pricing strategies on the perceived value of your goods and services, and how they intertwine in attracting the customers who will buy from you. Engaging in discounted pricing strategies often attract customers who are buying from you based on price, not your value. This can be a slippery slope. You may get clients who keep you busy, but who do not generate the profits you need to build a sustainable enterprise or build your net worth.
Reviewing the trend information for each major client segment is an impactful approach to revaluating the effectiveness of sales and marketing efforts. It removes emotions and relationships with clients to allow you to be more detached in considering their impact on meeting your business objectives. They are no longer people you like, but a bigger grouping of customer segments that impact future costs and business growth.
Jill J. Johnson is the president and founder of Johnson Consulting Services. Johnson helps her clients make critical business decisions and develop market-based strategic plans for turnarounds or growth. For more information, visit www.jcs-usa.com.