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Mix & Balance: How to Get Big Profit Gains

Randy MacLean, President — WayPoint Analytics

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Rapid and permanent profit gains come from focusing on mix and balance. When a leader is constantly driving actions that affect these elements, great cash-flow and high profit rates are assured. In this session, I'll show you what this means.

In his excellent book, "Islands of Profit in a Sea of Red Ink" (ISBN: 978-1-59184-349-8), Jonathan Byrnes of MIT says, "Strategy is defined by what you say ‘No' to." This is some of the best business advice I've heard, because following it can have a profound effect on the results that come from what you and your people dedicate time and effort to. It's also the underlying driver of superior profit performance.

Throughout your business, there are numerous things that populate a continuum of profit-value. Various products produce profits or losses, some vendors produce more profits than others, people are more or less productive, and customer relationships vary through a wide range of profit or loss contribution. In all these areas, and more, there's a mix of the valuable, and the detrimental, and managing this is the biggest opportunity to control profits.

There's a vital difference in mindset between top leaders and the back of the pack. Results-getting leaders view the winners and losers for what they are – contributors to, or destroyers of, cash-flow and profits.

Back-of-the-pack managers view everything as good" and "not as good" – they feel everything has "some" value, and this philosophy completely blocks their ability to improve much at all. Combine this with a lack of confidence about their team's ability to target and win the best business, and you have a recipe for "below average, trending to poor" performance. They simply value mediocre business too much to allow any productive focus on business with real profit value.

Whether your company has money to burn, or is hanging on by its fingernails, it's directly determined by your mix of profitable to unprofitable accounts and transactions.

To manage mix, or change the balance of positive to negative profit contributors, you start with profit ranking reports. Using WayPoint reports as examples, you can see gross margin rate (or operating cash percentage) which shows what you can afford to spend on each account. Then you see the expense rate, or what you're spending to service the account. Obviously, this needs to be less than the margin rate or you suffer a loss. Finally, you can see what the profit rate is – it's shown as "NBC" which is WayPoint lingo for profit.

If your company is typical, about 40% of your customers will be generating losses, and this mix is what drives low profits, and cash-flow challenges. Companies with super-high profit rates have shifted this balance, achieving mixes approaching zero. They can focus all their energy to giving superior service to high-profit accounts, and they have the cash-flow to spend lavishly on this and aggressive pricing.

You've probably noticed that margin rates on the report are all over the map, with no correlation to profits. This is another key difference in the way high-profit companies operate. They manage NBC profit, not margin, so they're not lured into the expensive mistakes most companies make, where high-margin deals produce big losses, and nobody can see it. And it's oh so easy to get high-margin sales that lose money – companies do it all day long, and it's what gets them in serious trouble.

You want to look at profit rankings for vendors, products, and sales territories as well. Armed with this data, you can tilt your efforts toward the biggest profit contributors. Better services and more aggressive pricing to win the type of accounts that have high-efficiency, high profit relationships, and the opposite for those on the other side of the scale.

You can examine your product profit rankings and find out which products and services attract the high-profit accounts, and which the money-losers. Shift the product mix for a better balance that attracts and serves the high profit accounts.

The ideal is to have only the good, none of the bad, and this is what the companies with 20%-plus profit rates are doing. These companies have a common strategy – they say "No" to low-efficiency, money-losing account relationships, "No" to products that attract money-losing activities, and are consumed with getting every high-profit account, and every profitable sale. They're sucking up all the profit oxygen in their markets, and their competition is slowly suffocating.

The scale of the opportunity is huge – most companies never see three-quarters of the profit they actually make from their best accounts – it's consumed by losses from the rest. Shifting the balance produces profit gains of 100%, 200% and more. That's why this really matters – it's the best opportunity for rapid and significant gains. Even a slight shift in mix producing more modest gains outstrips any past achievement.

You'll find other videos here that cover the best techniques, in detail. Things like profit-value customer segmentation, using whale curve analysis, the elements of efficient relationships, avoiding margin management and more. Spend a few minutes refining your approach, and you'll make a lot more money.

The takeaway is that when you recognize that your success is wholly determined by your mix of low-cost, highly-efficient, high-profit accounts, you can use your profit reports to relentlessly focus on winning and holding the bulk of the profits available in your market. As you change the balance between the money-makers and the money-losers, you'll deliver profit rates beyond your history and everyone's expectations.

Islands of Profit in a Sea of Red Ink


Audio file: wp-tips_15.mp3