| Have we forgotten how to make a profit? The small | | | | manufacturer’s range. Products are usually |
| businessman considers every sale to ensure a profit is | | | | grouped into product ranges so that a single group |
| made. Large organisations have bought powerful ERP | | | | discount can be applied. We would suggest |
| Inventory Control systems to manage their massive | | | | concentrating on the groupings that support say 80% |
| numbers of sales transactions. However these | | | | of customer spend. This may result in several hundred |
| systems have no emotion and are happy to sell at low | | | | groupings. Be careful however that applying a single |
| profit margins. The more complex the systems - the | | | | discount to all parts in these groups doesn’t result in |
| more places there are for profit to hide. A large | | | | some extreme margins. (This will be the subject of a |
| wholesale or distribution company could have 400 | | | | future article) |
| thousand products and 30 thousand customers. That | | | | Identify Low Achieving Sales |
| gives a possible 12 billion selling combinations. Of these | | | | Now break down the sales history into the customer |
| maybe only 100 million combinations actually sell. Is the | | | | and product combinations using a process we call |
| profit margin maximised on all of these sales? | | | | ‘micro-segmentation’. This results in millions of |
| We aim to show how clever management of your | | | | Customer / Product micro-segments. By grouping the |
| commercial data can identify the under achieving sales | | | | like combinations together, we can identify the under |
| and implement instant and substantial profit increases. | | | | achieving sales. That is not necessarily ‘low |
| Customer Segmentation | | | | margin’ sales, as we need to compare the sale |
| Firstly we need to get back to basics and understand | | | | with the margin that is achieved by the rest of the |
| our customers. Different customers have different | | | | customers in that segment. Therefore a 20% margin |
| needs, wants and expectations. We therefore need to | | | | for one segment may be good, but a 20% margin on |
| segment the customer base into different types and | | | | another segment could be terrible. Compare the |
| sizes. However, we need to be careful that we | | | | margin that would be generated from the system held |
| don’t stereotype a customer based on what they | | | | discount with the actual margin. This needs to be done |
| buy and how much they buy. If a customer was a | | | | because price overriding is commonplace and |
| large corporation and only bought one type of product, | | | | sometimes the very low achieving sales are |
| we may fail to identify their potential spending power. | | | | overridden. The beauty of this is that most of the time |
| Don’t however get hung up on getting the | | | | these are not high profile product groups and the |
| classification perfect. Often the account owner has a | | | | customer is not even aware of the great deal that |
| gut feel about the type and potential size of a | | | | they have been getting. |
| customer. We can revisit this later. | | | | Watch the profit increase – instantly! |
| Product Discount Groups | | | | Each individual low achieving sale may only be under |
| We now need to classify the products. The wholesale | | | | achieving by a few pounds, but add say 300,000 of |
| industry often works from Trade Price lists published | | | | these together and the resulting figure can be |
| by the manufacturers. These Trade Price lists are | | | | enormous. The majority of these sales are driven from |
| usually set very high, which allows the wholesaler to | | | | the system held data – therefore fix these high |
| offer a substantial discount. However, different | | | | discounts and watch the profit margin step up – |
| manufacturers have different definitions of ‘high’ | | | | instantly! A review with one wholesaler identified a |
| and there is often little consistency within a single | | | | seven figure profit opportunity! |