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9. HOW to Align for Profit: Profit Matrix. We have several ways to help clients align to segment for profitability. One of those we prefer is our profit matrix which starts a very productive conversation of “what is,” and stimulates a discussion with our clients of “what could be.” With the profit matrix we find the sweet spots to focus on for high-profit revenue, the duds to cull, and the hidden gems to grow. (See our alignment reality check for another tool to quantify “what is” and help stimulate ideas for “what could be” done differently and our strategy decision model for how to align for strategy execution using these new ideas.) We use existing data to immediately demonstrate opportunities to redirect efforts to grow profitable relationships and to grow margins on less successful relationships. We identify the poor performing products that are critical to key customers and find ways to assure that customers remain pleased with your service. You might start with just product profitability as a food manufacturer client of ours did. The profit matrix reveals which customer and product combinations are more profitable and which are not. With that we can help you to identify those segments with the highest opportunities to improve profits immediately and identify which customers are worth tracking for future profitable revenue growth. We recommend a step-by-step approach to more sophisticated analysis. For ways to start thinking about profitability, see our profitability checklist. In the following example, the manufacturer was selling a large number of products to a small number of customers, their distributors. But the approach works equally well when there are a lot of significant customers for a few major products. Manufacturer Scenario: Six customer segments spread throughout the five groups showed the highest potential for revenue and profit improvement. In one customer segment in one region—a segment with $80 million in revenue—we saw an opportunity to move a few key marginal C-level profit distributors (in the yellow zone) to high profit B-level contributors (in the green zone) by investing in them, treating them as if they were the client’s best distributors. (Typically, there are strategic opportunities for improvement in the yellow zone.)
It was worth trying, because it meant another $1MM in revenue per year from each distributor they transformed. It took some work to realize this benefit. Business rules for differentiated customer service had to be established and the sales and marketing organization aligned with operations to ensure delivery was to the expectations set for the customers. There was immediate payback—not just with the targeted distributors, but with all distributors. The business rules allowed the manufacturer to shift service resources so they didn’t underserve their best customers or overserve their worst customers. The words in each cell stand for the business rules used to increase profitability. Although done specifically for the manufacturer, this set of business rules is an appropriate starting place for any company to consider. With the profit matrix, you can agree on the strategic choices to make. These rules make sure sales and marketing and operations are on the same page so you know what you can deliver; promise what you can deliver; and deliver what you promise, profitably. Customers are treated differently, but all are treated well. They know what to expect.
With the profit matrix, it suddenly becomes clear what to stop doing immediately—stop selling unprofitable products to unprofitable customers, for example. Looking at the most important (and most profitable) customer relationships, it was also clear that the company must find a way to serve profitable customers—even when they bought unprofitable products. Dealing with unprofitable customers and unprofitable products, however wasn’t a matter of “always give everything to every customer” or “always get rid of unprofitable products”. Rather, by having different service packages for different customer groups, the most important customers are always satisfied, and the unprofitable customers are redirected to only profitable activities. New research shows the wisdom of these rules, although when they were originally established it just made common sense. (See several articles by Religence’s own Bob Sabath on the profit matrix including one on the research.) Executing this strategy the manufacturer was able to dramatically grow segment profit by a factor of six over the goal within three years. And, of course, this raised profitability for the company. Typically, this would be hard to do in such a mature industry. Additionally, the marketing atmosphere created by that success allowed the company to take the number one slot from the competitions’ former prize distributors, adding brand new priority relationships. Further, looking at the service unit, we saw a significant opportunity to capture share from the competition, which historically had a very poor service record. A service strategy in the same geography was mounted to gain market share. Similar successes were found in the other four promising segments. By exceeding expectations by six times over goal in these sweet spots, revenues grew dramatically in a slow-growth, mature market and they could meet their overall goal of 7% growth. The secret: consistently orchestrating a focus on small segments of customers who could be leveraged, using real-time measures, and aligning to manage and execute to the same drumbeat—from the executive level to the people on the frontlin with customers.
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