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.

Seven traits of Colorado success stories. Why some companies grow and others get stuck.

[Editor's Note: Over the past seven years, we have met with the CEOs or owners of over 200 private Colorado companies. These companies range from new technologies, products and services in such diverse fields as education, web conferencing, technology, construction, trucking, logistics, medical devices, outsourced services, among others. Some of these companies are growing - some quite rapidly; others are stagnant or stuck.]

Why are there such differences? Certainly companies that depend on some industries such as homebuilding or construction were severely impacted by the economic downturn. However, blaming stagnancy solely on economic malaise is an oversimplification. The recession – and subsequent “selective recovery” has highlighted the differences between the good, well-managed companies from those others whose fortunes rise and fall with the economy. We have found that industry, size, and the overall economy are not necessarily the determinants of company success.

Companies that have become "Colorado success stories" share certain traits. While this is not intended to be an all-encompassing list, this list is intended to provoke some thought about what breeds success.

1. Lifestyle or Equity Value. How many of you have ever been involved with a company where the owner was conflicted about current compensation or cash flow vs. investment for the future?
Be clear with what type of company you want to be. A lifestyle company can allow the owner to call his/her own shots and to move at his/her own pace. It is run for the cash flow and lifestyle benefits of the owner(s). In an equity value company, the owner strives to build real assets with a scalable, tangible value that can be bought and sold. This leader is willing to sacrifice some short-term gains in order to invest in growing the market value of the business. These “equity value” owners focus more on building value as seen by potential buyers: sustained improvements in revenue/EBITDA, and a strong management team that can operate and grow the business without the owner's constant involvement.

There is no right or wrong answer to the lifestyle vs. equity value question, but owners must be clear in the distinction. Straddling both lifestyle and equity value camps is sure to generate both lower current cash (compensation for the owners) as well as lower growth and value potential (lower equity value).
Below are some of the characteristics of Lifestyle vs. Equity Value companies.  Lifestyle companies tend to have a short –term focus; they tend to run at the owner’s pace or comfort level. Investment in the business may be secondary to a passion of the owner, such funding the as sponsorship of a team, or sport, or the arts. While these companies may have some elements of other management styles, in the end, there is a centralized nature to decision-making and authority. Likewise, since there may be limited empowerment or upward mobility for managers, high performers are not attracted to Lifestyle companies, or do not remain. See the article “Which do you have – a Lifestyle Business or an Equity Value business?”

Table 1

	Lifestyle	Equity Value
Focus	Short-term Lifestyle; Run for Owner’s compensation	Long-term Equity Value; sacrifice short –term comp
Pace	Owner’s pace	Dictated by desired outcome
Management style	Command & Control; Centralized	Decentralized; individual decision-making
Owner Management	Can tend to be viewed as inconsistent, capricious and changing	Consistent with overall strategy and core values
Expense Control/Spending decisions	Tightly controlled at top	Managed through approved dept budgets and policies
Outside Capital	Debt; Investors not interested; Growth may be restricted due to availability of capital	Equity investors
Empowerment	Limited; Loyalty Rewarded; Small circle of trust	Expansive; Performance rewarded; Systems to enhance empowerment
Objectives	May change at owner whim	Clearly outlined; transparent
Employee Equity	No	Yes; equity awarded
Career Development	Limited upside	Significant upside
Employee Capability	“Steady Eddies” Thrive here	High performers thrive here
Sale of Business	Usually only to Employees or Family	To third-party Buyers (Strategic or Financial)

2. Empower employees. Companies can't grow beyond a certain point if all of the real decision-making stays in the hands of the owner or a small group of managers. Growth companies look to empower employees to make decisions. They also develop a culture that allows employees to make mistakes and a mechanism so that they can learn and grow from the mistakes.

3. Hire for the next level. Companies that want to grow understand that they need talent that can manage at the next level. Successful companies hire people who can grow 1-2 levels higher in the organization so that the talent pool is constantly being strengthened. These companies also understand that paying more for top talent more than pays for itself.

4. Develop flexible strategies you can execute well. Traditional approaches to planning and execution assume away uncertainties and set a fixed plan in place for a year or more. Successful companies are developing multiple possible views of the future, developing a plan and actions, then revisiting the plan every 8-12 weeks to adjust to changes in the market or the competitive landscape. Otterbox, the designer and marketer of protective cases for smartphones, has grown from $15M revenue in 2008 to approx. $1B revenue with a flexible approach that re-evaluates all strategic operating plans every 6-8 weeks for possible adjustment. Other companies are utilizing scenario planning to develop and “rehearse” their responses to different possible future states in order to maximize their competitive position. See our article “Why every company should be doing scenario  planning” and the 5-part series on Scenario Planning.

5. Develop an adaptable organization. Successful companies focus on creating a culture of adaptability. They develop an organization, and leadership that can react quickly and make necessary course corrections in response to market opportunities. See the article “Adapt is new thinking” and the 7-part series on Creating an Adaptable Organization.

6. Focus on a superior customer experience. Dan King of ReadyTalk calls it developing "emotionally-connected" clients; Maria Vogt and Sonya Yungeberg of government contractor, Ayuda Management, call it "under-promising and over-delivering". These companies focus on wowing the customer and build systems and hire and reward people who want to delight the customer with every interaction. Engagement of customers is key.

7. Play offense instead of defense. If you do anything long enough it becomes a habit; then it becomes part of your culture. Many companies have created defensive cultures with several years of cost-cutting and deferring or eliminating new projects and new products. "NO" has become the operating word for "stuck" companies. Successful companies look for opportunities to develop and test new business models, new products and new projects. They see the market as ripe with opportunities to grow and innovate. "HOW" is their operating mantra.

Conclusion: Examine your company. Do you live the traits of successful companies?

Let us know your thoughts.

Congratulations to Pete Stevenson and the team at Latisys on the announced sale to Zayo

 Congratulations to Pete Stevenson and the team at Latisys on the announced sale to Zayo.

 Zayo Group Holdings Inc. agreed to buy Latisys Holdings LLC for $675 million, the telecom operator’s second-largest acquisition and its biggest move yet into data centers.
Zayo specializes in leasing so-called dark, or unused, fiber-optic cables to companies that want to expand their networks to cellphone towers and data centers such as those owned by Latisys. The deal would enable Zayo to sell more network bandwidth to Latisys’s enterprise customers while marketing its expanded data-center footprint to existing Zayo customers... More...

For more on Latisys, read the Colorado success stories article from Colorado Biz magazine

Congratulations to Bev Freedman, Bob Malone and the team at The Assist Group on the sale to strategic buyer Equian

Congratulations to Bev Freedman, Bob Malone and the team at The Assist Group on its successful  sale to strategic buyer, Equian.

The Assist Group, based in Lakewood, ClinAssist^® claims review process identifies improper hospital costs, providing comprehensive data and significant savings to payers. As a leader in complex claims review and resolution, TAG offers payers a complete solution – from initial screening through final resolution. The comprehensive claims resolution service supports findings, allowing payers to avoid reimbursing facilities for inappropriate billed charges. Results have produced an unprecedented uphold rate for identified billing errors, saving payers virtually millions of dollars each year. Leveraging TAG's extensive claims compliance experience, it also offers a negotiated discount option that enables payers to retain their existing facility discount and realize additional significant pre-payment savings, while complying with the strictest of payment deadlines.

Indianapolis-headquartered Equian is a healthcare information services company focused on lowering the cost of care by eliminating waste through integrated payment integrity solutions.

Congratulations to Woody Pastorius and the team at Mywedding.com on the sale to Meredith Corporation

DES MOINES, Iowa and NEW YORK, Nov. 17, 2014 /PRNewswire/ -- Meredith Corporation (NYSE: MDP; www.meredith.com), the leading media and marketing company serving American women, announced today that it has agreed to purchase Mywedding.com, further extending Meredith's reach to millennial women and the Company's presence in the $53 billion American wedding marketplace.

Mywedding.com, one of the top five wedding websites in the U.S., provides couples with the complete wedding planning product suite. With free planning tools, inspiration-focused content and a search experience designed to connect couples with local, national and international wedding professionals and venues, mywedding.com empowers couples to create a wedding that perfectly encompasses their unique style and budget.  The site offers advertisers exposure and connection to motivated millennial consumers at a pivotal life stage.  

The purchase of mywedding.com follows Meredith's recently announced agreement with Martha Stewart Living Omnimedia (NYSE: MSO), which includes the operations of the popular Martha Stewart Weddings magazine and website. Martha Stewart Weddings is a leading bridal magazine on newsstands and also a top digital wedding destination. 

The combination creates one of the largest audiences in the wedding media marketplace.  It gives Meredith access to millennial consumers at the earliest stages of family formation, complementing existing Meredith brands such as Fitness, American Baby, Parents and Allrecipes.  It further solidifies Meredith's position as the nation's leading media company focused on home and family. 

"With its access to younger consumers at such an important time in their lives, strong local sales model, and digital expertise, mywedding.com is a valuable addition to our portfolio," said Meredith National Media Group President Tom Harty.  "We believe we can further grow mywedding.com's consumer audience, while at the same time developing the next generation of consumers for Meredith brands and creating new sales and marketing opportunities for our clients."

There are over 2 million weddings in the United States annually, according to the National Center for Health Statistics.  Three-quarters of couples use online resources to plan their weddings, and spending on weddings totaled more than $53 billion in 2013. 

"We continue to strengthen our focus on the most important milestones in the lives of our consumers, specifically marriage, home ownership and raising a family," said Meredith Chairman and CEO Steve Lacy.  "This acquisition augments our initiatives in the digital space, and is consistent with our Total Shareholder Return strategy to pursue investments that scale our business and increase shareholder value."

Said mywedding.com President and CEO Woody Pastorius, "Mywedding.com is designed to meet the ever-evolving needs of the millennial couple, and through customized content and marketing programs we have successfully created a digital environment that connects this audience with relevant local and national providers. Meredith is the perfect home for us, and we are delighted to join with them to grow the mywedding.com brand."

Mywedding.com is the latest in a series of acquisitions, launches and alliances for Meredith's National Media Group.  Last month, Meredith announced a 10-year licensing agreement with Martha Stewart Living Omnimedia (NYSE: MSO) to acquire the rights to Martha Stewart Living, Martha Stewart Weddings and www.marthastewart.com.  In November 2013, Meredith launched the award-winning Allrecipes magazine, which followed the acquisition of allrecipes.com in March 2012.  

Additionally, over the last three years, Meredith has acquired the Eating Well, Family Fun, Every Day with Rachael Ray, Parenting and Baby Talk brands.  In spring of 2015, Meredith plans to launch Parents Latina, an English-language magazine with a ratebase of 700,000 targeting millennial Hispanic moms.

Meredith has also been executing a strategy to expand its broadcast television footprint.  In the last year Meredith's Local Media Group has completed or announced the acquisition of television stations in Phoenix, St. Louis, Mobile-Pensacola and Springfield (Mass).

"We continue to look for strategic acquisitions, partnerships and investment opportunities like these to expand our reach and create additional shareholder value," said Meredith Chief Development Officer John Zieser. 

The acquisition of mywedding.com will not have a material effect on Meredith's fiscal 2015 second quarter financial performance.  Meredith will provide more detail when it reports its fiscal 2015 second quarter results in January 2015.

ABOUT MEREDITH CORPORATION

Meredith Corporation (NYSE: MDP; www.meredith.com) has been committed to service journalism for more than 110 years.  Today, Meredith uses multiple distribution platforms – including broadcast television, print, digital, mobile, tablets and video – to provide consumers with content they desire and to deliver the messages of its advertising and marketing partners.

Meredith's National Media Group reaches an audience of over 200 million monthly, including 100 million unduplicated women and 60 percent of American millennial women.  Meredith is the leader in creating content across media platforms in key consumer interest areas such as food, home, parenthood and health through well-known brands such as Better Homes and Gardens, Parents and Allrecipes.  The National Media Group features robust brand licensing activities, including over 3,000 SKUs of branded products at 4,000 Walmart stores across the U.S.  Meredith Xcelerated Marketing is a leader at developing and delivering custom content and customer relationship marketing programs for many of the world's top brands.

Meredith's Local Media Group includes 17 owned or operated television stations reaching more than 10 percent of U.S. households.  Meredith's portfolio is concentrated in large, fast-growing markets, with seven stations in the nation's Top 25 – including Atlanta, Phoenix and Portland – and 14 in Top 60 markets.

Meredith's balanced portfolio consistently generates substantial free cash flow, and Meredith is committed to growing Total Shareholder Return through dividend payments, share repurchases and strategic business investments.  Meredith's current annualized dividend of $1.73 per share yields approximately 4 percent.  Meredith has paid a dividend for 67 straight years and increased it for 21 consecutive years.

Congratulations to Mike McCurdie and the team at SafeBuilt on the recapitalization with Riverside Co.

Congratulations to Mike McCurdie and the team at SafeBuilt on the recapitalization with Riverside Co.

Riverside Backs SAFEbuilt - Provider of Community Development Services

(c) 2014 Dow Jones & Company, Inc. 

 

Riverside Co . said it invested in SAFEbuilt LLC, which provides community development services for local governments and public entities, primarily those looking to privatize public services.

 

Established in 1992 and based in Loveland, Colo., SAFEbuilt offers services such as building department programs, planning and zoning, code enforcement and other administrative functions. Its affiliate company, Meritage Systems, provides workflow and operational support software for municipal building departments, Riverside said in a news release.

The Cleveland firm, which didn't disclose the terms of the transaction in the release, said the investment was made from its microcap fund.

The latest such vehicle, Riverside Micro-Cap Fund III LP, closed with $350 million in July and targets U.S. companies generating up to $5 million in annual earnings before interest, taxes, depreciation and amortization.

Commercial finance firm MidCap Financial LLC provided financing for the transaction. Riverside was advised by law firm Jones Day.
 

Brad Resnick, a Riverside vice president based in New York, said the SAFEbuilt investment was made on the thesis that local or municipal governments are increasingly turning to private companies for staffing assistance."Flexibility is a big reason," he said. "Another is that demand, especially for smaller communities, fluctuates pretty dramatically between the peak and trough seasons. If the governments are using all in-house staff, it can pose a challenge to efficient staffing, as they may have idle staff in [the] slow season."

 

SAFEbuilt works with more than 200 partner communities throughout the U.S.

Mr. Resnick said the company has expanded in geographic clusters, allowing swift and efficient deployment of manpower as it "can pull resources from neighboring communities if necessary to level the workload over a series of clients."

 

Riverside said it would work with SAFEbuilt's management team to enhance the company's sales and marketing approach, allowing for faster expansion in new and existing regions as well as deeper client relationships through both acquisitions and organic growth.

 

Without giving specifics to the geographies that SAFEbuillt is targeting for expansion, Mr. Resnick said the company is interested in markets where there is a higher level of growth and construction activity as well as stricter enforcement of building codes.

"Those markets with stricter codes are in general more receptive and can benefit more from our service," he said. "It is a focus of the community to make sure that the buildings and the code requirements be enforced, and it may affect resources involved in and around the permitting process of a particular community or municipality."

Riverside invests in business services, consumer brands, education and training, energy, health care and software and information technology. For buyout opportunities, it invests in companies valued at up to $250 million.

Execution- Failure to Launch: Reasons Company Strategies Don't Succeed

[Editor's Note: Almost 2/3 of all strategies fail to reach expectations. Why do so many business strategies fail? Below are some key reasons. Knowing the barriers in your organization to successful planning and execution is the first step. Clients that follow our recommendations have significantly outperformed the competition. We like to say, "A good plan, well executed, beats a great plan, poorly executed, every time." Contact us if you would like more information.

For another article on the importance of execution, see Harvard Business Review article The Execution Trap: The most brilliant strategy in the world won't do you any good if you can't deliver               -DPM ]

  Execution- Failure to Launch: Reasons Company Strategies Don't Succeed  

 

1. No clear definition of success  

Fuzzy goals lead to fuzzy outcomes. While it seems obvious, many organizations simply don't articulate the specific goal of a business strategy. If the goal of your customer intimacy strategy is to form deeper customer relationships, that's fuzzy. If the goal is to increase customer retention by 10 percent and increase annual revenue per customer by $10,000 and net profit by $1,000, that's clear. Here, deeper customer relationships may be the mechanism to achieve the goal.

2. Too many goals  

When everything is a priority, nothing gets accomplished. Many so-called strategic plans have too many goals, objectives, success drivers, strategies, initiatives and so on. Worse, it's not clear how these various appendages are linked. Is it any surprise these plans sit on shelves and collect dust? Choose to do fewer things much better.

3. Metrics and Alignment - Either no metrics or vague metrics 

Many plans are simply a brainstormed list of things to get done by unspecified people at indeterminate times. A plan with specifics outlines who will do what by when. It takes into account the sequencing and timing of tasks, activities and resources. Make certain that the goals of everyone in the organization are aligned to the few key objectives.

4. Visibility - Progress isn't measured and managed 

Ever notice how plans placed in the spotlight flourish while those left in the dark shrivel? Any plan worth executing is worth tracking. A monthly meeting with a tight agenda can quickly determine what actions have been taken; what progress has been made; what will be accomplished over the next month and by whom, and what, if any, challenges have emerged. This builds commitment, accountability and confidence in the process.

5. You lack the right people 

Some of those nice people who work for you may not be the right people to get the job done. That statement makes you uncomfortable, doesn't it? Many have been loyal, are committed to the culture, and may be friends and family. However, If you are truly committed to winning, or achieving success - however you define it - then at some point you have to take a long, hard, honest look at the capabilities of your people. Point them in the right direction, support them, develop them - give them a fair chance to succeed. But if they can't get it done, then your responsibility is to get people who can.

6. Flexibility - Failure to update the plan to stay real  

Reserve the right to do what makes sense. Plans are based on assumptions that can change over time. If they do change, then the plan may need to change. A quarterly "recalibration" meeting is a good forum to test your assumptions and determine which, if any, have changed. The meeting may result in either a re-validation or redesign of the plan. It ensures the plan stays real and relevant.

7. Reaction to Failure - Failure is met with indifference or an inquisition 

Is your team serious about its definition of success? Your response to failure sends a clear message about your commitment to winning. Just as importantly, it sends a message about your credibility. Do you ignore a failed initiative and move on to the next big thing (which conveys that you really weren't that committed and you shouldn't be taken seriously)? Do you look for scapegoats (which communicates that you don't take personal responsibility and can't be trusted)? Or do you first look in the mirror, take responsibility, then publicly commit to getting it right, and effectively engage your people to make it happen? Your choice speaks volumes about who you are as a leader.

Where does your organization stand? Mead Consulting Group's process begins with the identification of the barriers and obstacles to successful planning and execution. These "barriers" develop in ALL companies over time. In fact, some of the very things that help a company succeed at early levels will prevent them from succeeding at the next level. The key is to address these barriers so that the path is uncluttered.