How many of your products and customers are really profitable?
You might be shocked. Check out this short video.
So let me ask you a question, do you think all of your customers and products are profitable? I’m not so sure.
Hi, I’m Rob O’Byrne from Logistics Bureau, and I’ve been lucky enough over the last 20 years or so to look at the profitability of customers and products across most industries, hundreds and hundreds of different companies, and there’s a couple of interesting things I just want to point out to you. This might help you in your own organisation.
Let me just draw a chart here, and I’m not an artist, so put up with me here. What we’re going to look at is products and customers and if we were to plot the profitability of your products and customers, what you’ll probably find, and one of the challenges here of course, is that most reporting systems don’t report this level of detail, but what you’ll find is, I reckon about 10% of your products and customers will be loss makers.
You then get another big group, let’s say around here, and that’ll be about 20%, and these are probably marginal. So we’ve got 30%, which will be kind of break-even or worse, and then okay, the news just gets a little bit better. Again, this is averaging across lots of different industries. You now get about 60% that are profitable, so the news is getting better. What do you think your number might be?
And then right at the top here, we get about 10% that are highly profitable.
Now, I’m talking about profit here, but if you’re in a government organisation or not for profit, this sort of analysis is still really important because you want to be efficient, you want to be able to reduce your costs. Obviously, in a commercial organisation what that means is, that you can actually start getting more profitable. So it’s really important that you understand this from the supply chain perspective particularly in your business.
What are the costs that are attributable to servicing different products and different customers? Do you understand down at the customer and product level the cost of servicing them? And it’s absolutely important, because we’ve got to identify these guys because we’re not going to….., some people make this mistake, they want to get rid of these customers or products.
No, you want to start moving them up towards higher profitability. There are ways to do that. There are ways to do that.
So, let me ask you a couple of things. If you find this useful, I’m more than happy to take this to the next level and talk about specific industries, I can give you some case studies there.
So maybe just comment below and tell me what your industry is, you might just say retail, or industrial, or something like that, and I’ll see if I can show you how businesses in those industries take this information and then translate it into more efficient supply chains to start moving everybody up that profit curve.
The other thing actually I’ll mention is; that if you’re in Australia towards the end of October, let me find a spot where I can write this…… go and have a look at a website called 59things.com
Because that’s going to be one of our free events. It’s an all-day event and one of the 59 Things that I’m going to talk about in a fair bit of detail is this, understanding this profitability, some techniques to start shifting people up this curve, products and customers, to make them more profitable. Some case studies so you’ll understand a lot more.
So just jump on to that 59things.com. That event’s going to be around in Melbourne and Sydney in Australia, and we’ll talk in more detail about this.
But if you’re not here in Australia, put your industry below and I’ll share some more information on the following videos about how you can actually improve profitability in your industry.
So let me just come back to that question right at the beginning, do you think all of your customers and products are profitable? I doubt it.
This is a very conservative number. When I do this with companies across most industries, this number can be 20 or 30%. This is a very conservative number, only 10% are loss making.
I suggest you find out in your own business what that number is!
Register for 59 Things: www.59things.com
I live in the states, so I wouldn’t be able to make a seminar in Australia. DO you have them on a webinar to view?
Yes Rob, we do run webinars. Just register here and you’ll get invitations.
Nice information. Thank you so much for this article on supply chain profitability. Information provided in these blogs would be helpful for supply chain managers to find out various supply chain solutions.
Understanding and deep diving at the lifetime value of customer and product profitability calssifition are very important not only for profitability level,but also for business continuity!
Many thanks for this information.
Unfortunately,I am not residing in Australia to attend the event.
Where are you based ?
HI Rob , I am keen for some video insights to improve profitability.
I am in South Africa, and run a few bulk port terminals linked with rail as well as a couple stevedoring business’
We recently ran a similar exercise to what you described and results were astonishingly similar to your description, which is allowing the team to attack the assessment with a focused marketing action plan.
Perhaps we could learn a few pearls of wisdom from you on how to move up the profitability curve.
Glad to hear you are getting some great results. Well done! I’ll see what videos I can produce….
I am in a Regional Distribution centre, supplying parts to dealers in South africa. I would be very interested to find out how profitability can be increased (in production) and how to move our loss makers (dealerships) towards high profitability or at least reduce servicing costs.
You really need to carry out a cost to serve study to clearly identify the loss making customers, dealerships and parts. You’ll find lots of articles about it on the blog.
I am currently a student in the Masters of Science Global Supply Chain program at the University of Alaska Anchorage. Before I landed in this program I took several semesters of the Masters of Public Administration Program. This is relevant because I am working as a student worker at UAA and watching them cut, cut, cut due to decreasing funding from the state. I primarily work with international students but I was wondering if you have studied what customers are most “profitable” to a public university?
Wow, that’s a tough question, and one I haven’t specifically studied.
It kind of brings in the question of the role of the Public University.
I wonder if anyone has every conducted a ‘cost to serve’ study on University students?
I think the traditional view is that International students are more profitable (as they pay higher fees), but another factor would be the courses being undertaken.
A course with a higher student population you would think would be more profitable.
Thanks for the fast response regarding public universities. At my university I am told international students cost more due to the increased requirements they have to meet and the university has to meet for the government to allow the university to issue the document that allows the student to get a visa to enter the US. I have never seen the supporting data but that doesn’t mean it doesn’t exist.
In addition, we have policies that allow some of these students to be exempt from the out-of-state tuition. You are right about the courses; there are several programs that charged “enhanced tuition”; a 5% surcharge on all courses from the college or department (the College of Business & Public Policy being among these).
I think I will look for “cost to serve” studies for public universities and how they are done. Thank you for your input.
i find your articles invaluable and must thank you for the advice given.
i wonder if you had a link to any case studies involving breweries or wholesales?
We are both (both brew our own product and wholesales wines, beers and spirits) which is not so common.
i tend to look at both functions – wholesalers and beer producers and combine both, to benchmark
we have a one size fits in terms of our customer service charter, which i don’t believe works now we have grow such.
again many thanks for the information posted to date
Hi Dale, I’ll be posting a couple of articles in the next few days on your industry.