Profit & Customer Retention – Good Reasons for Managing Margins

‘Healthy’ margins are the life-blood of business - low margins damage the bottom line and excessively high margins threaten customer retention.  Yet many businesses spend little time managing customer margin profiles.  This article highlights the importance and value of margin management and introduces a simple approach for building this practice into your business review processes.

 

Drifting margins threaten your bottom line

As customers drop and pick up lines, costs change, and contracts expire, each customer’s contribution to your bottom line shifts - often without notice.  The result can be small customers buying at “big customer prices” or large customers paying too much and becoming easy targets for your competitors.

 

Strategic margin management requires effective measurement and periodic reviews to ensure that customers are living within their portion of your pricing model.  Simply put, similar customers should pay similar prices. 

 

A team response to margin exceptions

A simple, common sense approach to managing and measuring margins can identify drifting customers needing attention.  Grouping customers by type and then stratifying them by size creates pricing ‘peer groups’.  Although customers within a peer group may have differing prices for individual SKUs (that’s the nature of negotiations), customers within a group should contribute similar overall margins.  Any with significantly higher or lower margins needs to be reviewed as a potential margin opportunity or competitive threat. 

 

Managers can effectively decide which customers need review - but will often need the help of the sales rep, who knows the customer best, to decide how to respond.  Bringing the rep into the discussion has multiple benefits:

°          the rep can provide the missing information (beyond the data)

°          the rep takes ownership of the problem while formulating an action plan

°          the importance of margin management is emphasized with each conversation

 

Consider an example . . .

You discover that a customer is paying unrealistically low prices for a small number of items.  If this is a result of the gradual elimination of all but ‘loss-leaders’, the rep might choose to ‘re-sell’ the customer on the value of buying the full line – rather than risk losing the customer by simply raising prices.

 

Don’t let distance prevent this collaboration.  For reps in remote territories, web meetings are an easy and affordable way to work through the exceptions together.  There are a variety of inexpensive web meeting tools available to facilitate this teamwork.

 

Create a work-flow for managing margin exceptions

So why do so many businesses struggle with, or fail to perform, such a simple process?  Some lack the tools and time to identify margin opportunities and threats.  Others become frustrated spending time that feels like it could be “better spent selling”.  But in reality, identifying and working with existing customers can be an fast, easy and profitable way to invest time. 

 

Rather than skipping the margin review, perhaps a revision in tools and process is needed.  Traditional sales reports can provide summarized margin analysis but do not provide the details needed formulate targeted plans for under-performing customers.  And the time spent referencing secondary reports and inquiries often feels like an unprofitable ‘fishing expedition’. 

 

Margin management tools & techniques
The key is pin-pointing exceptions and quickly exploring the underlying causes.  Data-mining tools are better suited to this challenge than traditional sales reports and inquiries. 

A properly configured set of data-mining tools will:

1.       accelerate the process of  identifying areas of need,

2.       provide instant access to deeper data to diagnose underlying causes

3.       facilitate the formulation of plans where adjustments are needed.

 

Overdrive offers data-mining “margin mapping” tools that organize customers into pricing peer groups and provide margin ‘scatter plot’ charts to highlight outliers.  From the charts you can drill into the customers to see their margin profiles and the potential value of bringing them back into line with their peers. 

 

Additional drill downs are available to review individual products and their sales history. This information makes it easy to review and analyze the customer’s buying patterns and formulate an action plan.  Additionally notes and actions can be attached to the customer to facilitate follow-up down the road.  (click here to learn more about Margin Manager)

 

OverDrive Solutions offers a Margin Management Workshop where we work together with your data and our tools to evaluate current margin exceptions and formulate corrective action plans.  With minimal financial and time investment, you can explore the value of margin management for your business (click here to learn more).

 

In summary . . .

When it comes to managing margins, an ounce of prevention is truly better than a pound of cure.  We all know the struggle of recovering lost customers and, when it comes to shrinking product lines, it is far easier to rebuild a shrinking product line before the customer cements relationships with other vendors.  So now might be a good time to evaluate your current margin management process and consider an upgrade of your tools and processes. 

 

We welcome your comments and questions about this and other sales optimization topics.  Feel free to contact us at info@overdrivesolutions.com  to start a dialog. 1.702.476.0878