3 strategies for managing your nonprofit clients
Managers today have a huge unanswered opportunity to engage and manage their large nonprofit clients, creating win-win relationships that rapidly increase profits and lock in those key client relationships. As yesterday’s mass markets fragment, managers must move from extensive product management to highly focused management of target customer segments – and even individual customers.
In previous HBR articles, we have described transaction-level profit metrics, an innovative new set of digital transformation metrics. When businesses use these metrics (creating a comprehensive income statement for each invoice line), they quickly find that their customers fall into three broad profit segments:
- Profit peaks – their high income and high profit clients (usually around 20% of clients who generate 150% of their profits)
- Profits are running out – their high income and low profit / loss customers (usually around 30% of customers who erode around 50% of those profits)
- Enjoy the deserts – their low-income, low-profit customers who produce minimal profit
The potential increase in profits by returning losing customers is huge. For example, in a mid-sized distributor, 18% of customers generated 140% of the profits and 28% of the customers drained 47% of those profits. (The remaining 54% of customers accounted for the rest.) The transformation of 20% of customers who drain profits into peaks in profits resulted in a 40% increase in overall profits. In other words, focusing management on just 7% of their clients generated an initial profit increase of 40%. Here’s how managers can turn their low profit clients into peak profit.
Reduce costs on both sides
Your nonprofit customers are an important potential source of profit. Engaging and managing those large, low-profit customers requires a very different process than what you use for your customers at peak profit and desert profit.
The essential first step in turning your customers into lost profit is to identify them. It sounds obvious, but most businesses just focus on growing all of their big customers. For nonprofit clients, this means generating more losses. Transaction-level profit metrics are needed for this because, surprisingly often, gross margin does not capture the most important profit factors.
In our experience, customers are rarely drained of profits due to below market prices; they are loss of profit due to an excessively high cost of service, usually caused by relatively minor factors that are neither seen nor managed. The good news is that this is often relatively easy to solve: you can create a win-win solution for both businesses, increasing customer profitability while converting many into profit peaks. We call this process of joint cost reduction – increasing profitability by lowering the cost of service rather than increasing the prices – conditional pricing.
For example, a distributor that we will call Harbor Supplies (not his real name) recently decided to install vending machines loaded with their products at their large customers. Harbor financial data showed that this company produced strong revenue growth and gross margins.
However, when the company implemented its new profit metrics at the digital transaction level, managers found that the vending business was actually driving net profits. The detailed income statement for the Distributor segment clearly showed that the problem was that customers were ordering replenishments several times a week. The cost of preparing and shipping an order was higher than the gross margin – a common issue that was not detected by traditional finance but became immediately visible with new segment P&L at the level. of the transaction. It was just as costly to the customer as it was to Harbor.
Managers found that sales reps earned setup bonuses by telling potential customers they could set up machines to have minimal stock and even order every day. (Customers’ purchasing managers were responsible for the cost of inventory, not the associated costs of ordering and restocking machines, so it seemed like a good deal to them.) It was losing profits for these large customers.
Fortunately, this was easy to resolve: the sales team inserted a replenishment frequency clause into contracts and met with customers to explain how this would reduce customer ordering and put away costs, creating a win-win situation. -winner. Virtually all of these nonprofit clients have turned into peaks in profit.
Assign the right teams to the right customers
Once you have identified your nonprofit clients, the next step is to engage and manage them with specialized, multi-capacity teams focused only on building ongoing relationships to lower the cost of their service. – and often reduce customer costs. In the process. Since lost profit issues are more often than not lower level operating issues, such as order models, the team should be made up of specially trained operations managers.
New digital metrics at the transaction level are critical to identifying opportunities for win-win cost savings, as virtually all improvements in operating costs are unrelated to price. Most companies engage their large customers with the implicit goal of increasing prices, thus creating a zero-sum relationship. Nonprofits, on the other hand, have the explicit goal of reducing costs for both supplier and customer, creating a win-win relationship.
For example, Natco Distributors (not real name), a national industrial distribution company, had always provided next day service to its customers. Often times, this involved expensive shipping and shipping from a central warehouse if a local distribution center ran out of stock for a product. This was very costly and in fact resulted in the loss of profits for several large clients.
When Natco’s dedicated profit reduction team spent time with these clients, they found that in many cases the company did not need overnight service. The team partnered with counterpart officials from those companies to identify which shipments actually required overnight service. This change reduced shipping and cross-shipping costs for Natco, turning those customers into peaks in profit. In return, Natco guaranteed 100% order fulfillment on schedule (eliminating ineffective back orders). This was a significant advantage for these customers.
Nonprofit client teams have visibility into the best practices of all of their clients, allowing them to compare similar businesses, identify problematic client cost drivers and how to improve them. and quantify the potential improvement in profits.
Consider three cost elements
In our experience, a small number of cost elements provide many of the best opportunities for improvement:
Order model. As in the example of vending machines, this factor is rarely managed. It is relatively easy to modify in most cases (although some orders must be dispatched at a fixed time), and it offers significant gains for both the supplier and the customer.
For example, we recently worked with a large hospital system to optimize their replenishment ordering model, taking into account common supplier and hospital costs. At this reputable and efficient hospital, we were able to reduce its supply chain costs by over 40%, with increased service levels.
The range of products. In businesses without digital transaction-level metrics, sales and product managers don’t know the true bottom line of each product. Some customer orders are for a specific named product, but most are for a generic need, such as wrap-around safety glasses. Alternative products that meet this need at a similar price usually have very variable net benefits. Transaction-level metrics reveal the net margins of each product, allowing product managers and sales representatives to maximize profitability of product mixes at no cost to the customer.
This creates a new opportunity to create an internal “profit catalog” for use by sales representatives. The new catalog takes the traditional list of products but adds the overall net profit for each. In a business, sales reps receive monthly reports on the profitability of each customer’s product line, with suggestions for higher profit additions and substitutes.
Command channel. Most companies are quickly moving towards EDI (electronic data interchange or electronic ordering) because it allows significant savings. However, businesses with EDI orders lose the ability to cross-sell, up-sell, and research important customer information.
The solution. Use EDI for your small customers to lower your service costs, but for your big profit peak and drain customers, selectively recall once the EDI order is received to cross-sell, up-sell and maintain the close relationship.
By continuously working with nonprofit clients, your multi-capacity teams will gain an in-depth understanding of these clients’ profile and development paths, as well as operational cost issues that can be resolved. This will allow your Profit Drain Teams to identify potential customers who may become Insoluble Profit Drains.
This knowledge is invaluable. Your nonprofit teams should partner with your sales managers to incorporate these profiles into your account selection and management processes, allowing them to laser focus on creating accounts that will peak profit or potentially be converted into profit peaks and avoid those which will be irreversible profit drains. Putting all your knowledge and expertise to work to ensure that your salespeople consistently avoid those that will irreversibly erode your hard-earned profits is the greatest hidden profit lever of all.