Where to Focus Your Efforts for Fast Profit Gains

Friday, October 6, 2017—Every sale has three dimensions that determine its profitability: volume (or size of the sale); margin (amount of operating cash generated above the cost of the product); and cost-to-serve (the total cost of processing the order including the company's personnel and infrastructure). These three elements determine the profit (or loss) from the sale.

There are three dimensions to the profitability of every sale, every customer, and every product. One of them is practically invisible, so little managed, and the gateway to industry-leading profits.

Welcome back to Profit-Tips.

Every sale has three dimensions that determine its profitability: volume (or size of the sale); margin (amount of operating cash generated above the cost of the product); and cost-to-serve (the total cost of processing the order including the company's personnel and infrastructure). These three elements determine the profit (or loss) from the sale.

The first two are well understood and have been carefully managed for decades. The last is much more mysterious, as accounting and ERP systems don't show it at any level of detail, other than company totals. Nearly everyone is aware costs matter but, absent the tools to see what costs really are, this dimension is practically unmanaged.

Most companies have made attempts to work out costs using spreadsheets, but the numbers fluctuate wildly through time, leaving the companies working on assumptions that simply aren't accurate enough to avoid losses on individual sales. In fact, more than 60% of sales on the distribution sector are money-losers. This has lead to almost universally poor profit performance.

Most companies think of themselves as being subject to margin erosion. The reality is that their profit challenges are due to not having visibility of the individual cost-to-serve on each sale, and for each customer. Those that have cost and profit-tracking systems like WayPoint can see precisely how to balance volume, margin, and cost-to-serve on every sale and in every account.

Why it Matters:

Well, when a company has a profit analysis system giving complete knowledge of the three dimensions, it has fewer losing sales, can turn profits with lower prices, and has significantly higher levels of cash flow and profits.

I can't stress this enough. These companies can see where aggressive pricing can still be profitable, putting margin pressure on their competition who're mystified about the seemingly "crazy" pricing. They take business away from competitors by exploiting the competitors' inability to identify and quantify low-cost opportunities to make profitable sales. It's no wonder these companies win so many bids, and have such great cash flow.

Takeaway:

The best way a company can immediately and significantly increase its bottom line is to get to work on exploiting the cost-to-serve dimension of every sale. Getting to work on this before the competition does is the fast track to success.

If you'd like to know more about the sophisticated analytics that help our clients out perform well just about everyone visit our website at http://www.WayPointAnalytics.net.