Customer sales and margin is a sensitive area in business analytics.

When we look at customer sales,  we sometimes find we don’t know our customers very well.  This is the prime function of your business–to serve your customers.  Remember that!

But to improve profitability and cash flow we need to look at margin (sell price less cost of sales).  We know our customers don’t want to pay more so increasing pricing many times is not an option.

I remember working with a computer business some time ago. Margins were shrinking to single digits. The owner would say “It’s not what you sell it for, it’s what you buy it for.”

He certainly was right, but there are still many ways to increase overall margins and profit.  For higher volume businesses such as retail, medical practices, distribution companies, etc. we need to analyze customer sales and customer gross margin on a macro level, then dive into it in a granular way.

I like to use the profitability/volume matrix above to help me identify some parameters.

I’ve used the profitability/volume matrix above with companies of all shapes and sizes to identify some parameters and thoroughly analyze their sales and margins.

At a small truck parts distributor, we defined customer segments and allocated all related costs so that we had sales, gross margin dollars, gross margin percentages, allocated costs, and net margin broken down by customer.  We moved the definition for ‘volume’ and ‘margin’ so 80% of their customers fell into the low volume and low margin quadrant.   (The old 80/20 Rule…..by the way. Read The 80/20 Principle by Richard Koch and see the resource page for a useful 80/20 tool.)  We looked at the attributes of the customers in the low volume/low margin, and the attributes of the high volume/high margin quadrants.

We worked with the sales team, sharing the data and developing specific markers and targets, again on an 80/20 basis.  We worked to increase the size of smaller orders (which made sense for many of their customers as well), we analyzed lower margin product lines and specific pain points, and addressed a customer set-up process with improved  margins from the get-go.  We involved the sales reps in order to make these modifications successful.   They became part of the process.  They were the ones who identified the issues and were responsible for implementing the changes.

The company increased gross margin 4.2% over a three-month period and generated $150K of additional annualized profit in that period.  Not bad for a few hours of work.  We continue to use this analysis a couple times per year this group’s sales team, and overall margins are tracking upward in an industry that has seen margin decline.

And don’t kid yourself about your true costs.  I worked with another company a few years ago doing the same analysis.  We determine that half their product line was being sold at barely a break even point.  It’s impossible to have profit if you’re taping $5 to every box you ship.  Be careful of thinking that you will make it up with volume–the more you sell, the more you lose.  For this company, we ended up going back to the P&L to eliminate as many costs as we could with a value stream map on that particular customer group.  We went to the customers for a long overdue price increases.  Those discussions went better than we expected.  End result: after 12 mos: $500K swing in profits and back to profitability!

I hope you are convinced by now of the value of analyzing customer sales and margin. I can help!