Five ways for you to fail - Using customer profitability to become customer-centric Part 2

Part 2 - Using customer profitability to become customer-centric
   Five ways for you to fail

[Editor's Note: This is Part 2 of a series on customer profitability. I hope you find it useful.  - dpm]

We hate to present things in negative terms. However, many companies try hard to be customer-centric, but their efforts fail to add value to the company. Frequently, they commit some - and sometimes all - of the following sins:

DENIAL
Do you insist that the differences in the profitability of your customers aren't important or aren't measurable with current systems? Do you deny that you have unprofitable customers? If you try to calculate customer profitability, do you exclude some operating or capital costs? Does every cost in your company get allocated to a customer?

THE GROWTH ILLUSION
Are you adding lots of new customers without knowing how much they cost to acquire or how long they're likely to stay? Most important, do you know about the economic profit (operating profit minus a capital charge) you can expect from each new customer?

THE ILLUSION OF AVERAGES
Do you make decisions based on average customer profitability (profitability by segments or markets)? Are you aware of how much profit comes from the best 20% and the worst 20% of your customer? Are you unsure about which specific elements of customer behavior cause customers to fall into the top and bottom groups?

FAILURE TO ACT Do you fail to make specific managers fully accountable for acting on customer profitability? Is your strategic plan disconnected from the economic profitability of customers?

FAILURE TO DRIVE COMPANY VALUE
Have you stopped short of figuring out how much each customer segment contributes to your share price or overall company value? Have you told your board and your stakeholders how you're using your knowledge of customer profitability?

 

Focusing on customer profitability is key to becoming a truly customer-centric organization. Calculating net profitability by customer is the start. Sustainable improvement to company performance requires changes to strategy, structure, organization, culture, and measurements.

 

Improvement can start immediately! The good news is that many of our small and middle market business clients see measurable profit increase within the first three months of implementation.

Congratulations to Mark Phillips and the SLI Global Solutions team on the sale to GLI Group

SLI Global Solutions Joins the GLI Group of Companies

LAKEWOOD, N.J. (March 2, 2015) – The Gaming Labs International group of companies is pleased to announce the addition of SLI Global Solutions (SLI), a leader in Quality Assurance and Software Testing Services, to its growing portfolio of companies. With this acquisition, SLI Global Solutions and GLI combine to form one of the largest organizations with a singular focus on software testing and quality assurance worldwide.
GLI President/CEO James Maida said, “Just as GLI is recognized for its global leadership in gaming testing and professional services, SLI has long been recognized as the leader in government solutions; testing for certification of health IT, and voting system certification testing; software testing and quality assurance. Those similarities extend to the culture of each company. With testing and certification at our core, both GLI and SLI have shared beliefs in excellence, passion and commitment to our clients and to providing the best services available anywhere. Moving forward together, we will share that culture and commitment to excellence, providing even more customers with broader levels of testing, certification and professional services.”
SLI President Mark Phillips said, “SLI has built a scalable delivery model using documented and repeatable processes delivered by highly credentialed and experienced staff and enhanced by innovative tools and techniques. Because of this, SLI has been able to provide significant value to both private and public sector clients as they develop their most strategic IT products. We are excited to join the GLI family of companies to rapidly scale and deliver these solutions to a much broader range of clients.”
SLI ensures information technology investments result in products that are built according to agreed upon standards, perform as expected, and fulfill business needs. Together, GLI and SLI will represent one of the world's largest providers exclusively dedicated to quality assurance, technology testing and IT governance-related solutions.
SLI brings a broad portfolio of services and solutions to GLI including world class software test automation, quality assurance, and independent verification and validation for commercial and government agencies.  SLI has earned a number of designations including an ISO 9001:2008 certification for its Quality Management System and ISO/IEC 17025:2005 accreditation for software testing for electronic health records and voting systems. SLI leads the industry with its own proprietary quality management methodology, SQM³, which is based on practical applications of IEEE, PMI and ISO standards.

About SLI Global Solutions:
Since 1996, SLI Global Solutions has been helping customers manage their technology risks and investments. As a company that has earned an ISO 9001:2008 certification for its Quality Management Systems and ISO 17025 accreditation for all laboratory work, we provide software testing, quality assurance (QA), and independent verification and validation (IV&V) for commercial and government agency clients that are based upon our proprietary quality management methodology, SQM³.
www.sliglobalsolutions.com.

About Gaming Laboratories International:
For 25 years, Gaming Laboratories International, LLC has continuously delivered THE best quality land-based and iGaming testing and consulting services with supreme accuracy while reducing time to market. With 20 laboratory locations spread across Africa, Asia, Australia, the Caribbean, Europe, North America and South America, GLI is the only global organization of its kind to hold U.S. and international accreditations for compliance with ISO/IEC 17025, 17020, and 17065 standards for technical competence in the gaming, wagering and lottery industries. For more information, visit www.gaminglabs.com.

# # #

GLI Contact: Christie Eickelman, Vice President of Worldwide Marketing
+1 (702) 914-2220, c.eickelman@gaminglabs.com

SLI Contact: Cassandra Pierce, Market Operations/Recruiting

+1 (303) 575-6881, x161, cpierce@sliglobalsolutions.com

 hillips

Using customer profitability to become customer-centric

[Editor’s Note: We initially published this eLetter in 2002. Since that time, we have assisted many clients in gaining a better understanding of their customers and profitability. I hope you find it useful.     – dpm]

Some companies calculate the net profitability of every one of their customers every month!  Why? Because they have discovered that the company profitability is built “one customer at a time” and that all customers are not the same.

What should be included in your calculation?
Every cost in a company should be allocated to a customer. In a manufacturing company, for example, costs should include the product cost, freight and delivery, cost of generating and processing an order and collecting from the customer (from sales, sales support, customer service, technical service, order entry, scheduling, rent, warehousing, picking, staging and loading, insurance, accounting, credit and collections, terms, warranty costs, cost of capital for plant, equipment, information technology), R&D, and corporate overhead.

Why spend so much effort at this micro level?…Because companies have discovered that examining profitability at the customer level provides not only amazing data about the cost of acquiring, servicing, and maintaining customers, but perhaps most importantly can provide insight into new product and service opportunities to gain a better share of their best, most profitable customers.

Cost of serving customers. One of our distribution clients found that, due to the cost of processing and special packaging an order, order size was a far greater determinant of profitability than gross margin. Product and pricing was adjusted to reflect the value of special packaging, while introducing new standard packaging that covered a broader number of customer needs.

Cost of acquiring new customers. Another client discovered that marketing programs that were designed to grow revenue were inherently flawed. One program, (judged a great success since it added $7 million in revenue by the second year) added customers that cost $2,000 to acquire, but who only generated $1,350 of profit during their tenure as a customer. In truth the company lost $650 on each new customer acquired under this program.
                                                           
Insights into best customers.  Opportunities to cross-sell additional services and products. One client found that its best customers in the construction trade were notoriously poor planners and had difficulties forecasting demand. By providing a rather basic scheduling service for these clients, it now provides better service at lower costs and charges a premium price. It has solved a real issue of pain for both customer and supplier …AND…with the increased knowledge about the customer’s needs, it has begun to develop and sell additional products to their best customers.

Calculating Profitability per customer does not require a significant new investment in Information Technology or Accounting Systems? Most of the small and middle market businesses we work with have implemented some form of customer tracking software and cost tracking software(CRM, Manufacturing, Order Processing, etc….some may have Activity Based Costing) which is sufficient to get started. Following the customer interaction through the company’s business processes and establishing some cost allocations is the next step. This is an iterative process with calculations and allocations improving over time. Typically, the segmenting of customers by profitability is easy to discern and companies find that they can begin to implement measures quickly.

Focusing on customer profitability is key to becoming a truly customer-centric organization. Calculating net profitability by customer is the start – sustainable improvement to company performance requires changes to strategy, structure, organization, culture, and measurements.

Companies are generating outsized improvements. Mead Consulting clients that have embraced customer profitability have enjoyed significant improvements in performance both in revenue as well as profitability. To see more information on some of our client improvements, visit our client success stories page.

In work with our clients, we utilize proven methods designed to center the business around customer profitability. If you would like more information, please contact me.