How Is This Possible?
Something happened last week that got me thinking, and surfaced important principles that light the pathway to profit gains.
A well-known industry expert – someone I highly respect – posed a pretty interesting question, so I spent some time in our data pool to quantify the answer.
The question was, roughly, "How can companies possibly deliver bottom line profits greater than available margins?"
I think the question reflected skepticism over some of the 20%+ profit rates we're seeing in client results. I think he couldn't reconcile profit rates at or near industry averages for margin.
I went to the data for the answer, and the numbers to back it up. What I found is illuminating. (We have invoice and financial data across hundreds of companies in dozens of industries going back more than a decade.)
I pulled roughly $100B in distributor business across sixteen industries. This includes results both before and after implementation of analytics-driven profit-improvement initiatives.
For brevity and clarity, I'll use these terms:
These are the basic averages from the data set:
GM%: 23.1%; NBT 5.6%; PIP: 15.4%.
The PIP number is interesting. These companies already have 15.4% profit rates on their money-making sales – just about triple their overall rates. Back to this in a moment.
We've long known that GP$ is the upper limit for profit (if costs are theoretically zero). Therefore, the profit ceiling for a sale with 22.5% margin is 22.5%.
However, the same's not true for losses – they can easily exceed GM% and even exceed revenue, resulting in losses many times the GM%. They're a much more significant contributor to a company's financial performance than margins, and are usually determinative in profit or loss delivered in a company's results. This group is significant, too, with more than 60% of invoices falling into the money-losing category.
It's pretty apparent that companies have some portion of their business with margins that surpass their average, so I wanted to quantify this to find out if it's significant.
I found that a whopping 66.1% of item sales (representing 42.6% of total revenue) have margins exceeding the 23.1% mean. Average margin for this subset is an eye-opening 40.1%, and the NBC profit line for these sales is 18.7%.
Stated clearly, nearly 1/2 of distributor revenue and 2/3 of individual item sales have margins averaging more than 70% higher than the mean.
Yup – really significant.
In broad terms, our clients are doing two things: swapping customers to shift customer mix toward those with the highest profit conversion rates; and increase operational efficiency throughout their internal logistics chains. These initiatives drive up profit rates, so raising that already-existing 18.7% rate into the 20s isn't much of a stretch, especially when the margin for the segment averages 40.1%.
OK - cool stuff for us geeks, but what does this mean in plain English?
More than 40% of the business has an average margin above 40%. This is huge!
Pretty much everyone already has significant high-profit business in their sales envelope and, therefore, the opportunity to expand and exploit it. They're trading out under-performing customers for better ones.
Meanwhile, with nearly 60% of sales underperforming averages, companies with advanced analytics can focus efforts on reducing costs and increasing operational efficiency. This raises profit rates across the board. Utilizing real productivity and efficiency measures throughout operations focuses resources and cuts costs, reducing the proportion of money-losers.
A company's profit rate is simply the spread between margin dollars and cost-to-serve. Companies that are raising one while reducing the other are showing gains. There's such a big envelope of high-margin business, and such a large component of seriously unprofitable sales, that making improvements in both areas is delivering unexpectedly-high results.
So, to answer the question...
Companies using advanced profit analytics are delivering eye-popping profit rates that are well above industry averages for margin alone by shifting the mix in their customer set, while reducing the costs by making their operations more efficient. They operate in their own environment where sales margins tend to be higher, and operating costs are lower.
Their world is nothing like what the industry averages suggest.
The numbers are real, and the inevitable result of capable executives identifying and exploiting previously-unseen opportunities. The exciting thing is – this scenario holds for all companies – there's a lot of high profit and low-profit outliers that can be managed to produce record results.
This webinar unveils the exceptional power of our Margin Analysis report. During this session, you will gain valuable strategies to immediately capitalize on lucrative opportunities and drive your company's success. The WayPoint Margin Analysis report provides a dynamic customer list segmented by profit value and efficiency. It presents their current margin, target break-even margin, margin required for contribution, and coverage of sales compensation. "Contributing" customers exceed the company average profit rates. Additionally, customers falling below the target margin display the precise price adjustment needed to reach the target. Unlock valuable insights for optimizing profitability and strategic decision-making.
Any organization that runs a fleet can benefit substantially from knowing transport costs at the customer/delivery level. This component of the customer cost envelope plays a big part in understanding customer value and drives decisions on pricing delivery, setting margins and routing decisions. To do this at the top level, companies are moving away from using mileage, and toward a much more accurate and effective time-based measurement. WayPoint can utilize the better inputs, calculating very precise costs at the customer level. A time-based system is also dynamic, reflecting cost changes driven by daily route changes, opening numerous new ways to optimize delivery costs. In this session, we'll show your team how this is done, and how you can find significant reductions in delivery expenditures while improving customer service. This is a session for operations people, CFOs and chief executives, so assemble your team and be ready to continue the conversation at the end of this 30-minute session.
The 3rd of 3 lists defining the markers of Distribution companies outpacing their peers. These are the specific areas that many companies commonly miss and places where your focus on new strategies and tactics will make a huge difference on your productivity and profitability.
The 2nd of 3 lists defining the markers of Distribution companies outpacing their peers.
The 1st of 3 lists defining the markers of Distribution companies outpacing their peers.
With the right segmentation you can define customer service levels, delivering high service levels to the accounts that need and can afford it. You can set price levels appropriate customers needing every level of support from "no frills" to "gold-plated". You can focus your sales efforts precisely — working to acquire new customers that perfectly fit your strategy and deliver increased profitability through optimally-efficient logistical relationships.
Fleet and delivery operations are a frequently overlooked opportunity to add much more profit to your bottom line. In fact, every dollar you save or charge is just as beneficial as $25 in new sales. No wonder today's top companies are using surprising new methods to measure and optimize fleet costs, and implementing advanced analytics to set pricing and policies for deliveries.
New ideas and new tools are shaping customer choices, and increasing competitiveness. This video shares what we've learned from hundreds of the best companies across more than 15 years of strategic planning and on-the-ground tactics that have generated millions in new profits.
Rebates have grown tremendously as a percentage of the bottom line of distributors over the course of the last 3 years. In fact, in most instances, they now account for more than half of year-end profit.
In this session you'll gain insights on: How rebates are impacting your true line-item profitability / How to leverage your existing agreements / How real-world product mix add-up.
We've added exciting new capabilities to the waypoint user interface. In this video we show you all the newly added features that will increase ease of use in the WayPoint program for a more convenient experience.
In this session, Randy MacLean walks you through the newest and most effective analytics for profit management. Using these metrics, companies produce record-breaking profit rates and growth. In just 17 minutes, he covers the hidden dynamics that are adversely influencing profit rates, suggests the not-so-obvious solutions executives are using to address them, and shows how WayPoint measures and reports on them. You'll see the only reports available that give company executives the ability measure, monitor and manage the real drivers of company profit.
Randy MacLean shares his analysis of over $65B of distribution business to help others shed incorrect assumptions about how to make money. Businesses that have stellar results have been able to understand profit dynamics and move the profit needle not just by five or ten percent, but by doubling or tripling the bottom line over their competitors.
Everyone eventually faces the loss of a significant account. Sometimes it's one that represents such a large share of business, that "normal" operations are no longer possible. How you handle the situation will determine whether it's an unpleasant blip, or a near death emergency. This video shows what to do to keep your ship from afloat when the inevitable happens.