Eight Fundamental Drivers of Profit

Eight Fundamental Drivers of Profit

Are you really doing all you can to drive profit? The surprising answer is that many leaders and their teams are not. I am not referring to more customers or more sales or more locations or more salespeople. I am talking Profit

Based upon my experience and that of my colleagues with clients in the US, New Zealand and Europe, here are my eight fundamental drivers of profit. Can you drive consistent profitability or increase it dramatically in the next quarter?

1. Niche Drives Profit
Be narrow, go deep! Narrow your focus to change your frame and change your game. Your focus can be unlimited. The real power comes when you narrow it. With the power of today’s connectivity it’s possible to niche market and mass sell.

The classic mistake many companies make is trying to be all things to all people. Their message is watered down to appeal to more people. And the result? It will end up appealing to no one.

2. Distribution Drives Pricing and Profit
Formulate your distribution plan well before setting price. Many companies learn too late that their established margins cannot support resellers and distributors that come into play. In other words, can your pricing scale?

Many companies think this is different with digital products and services. Think again. Will you have co-op advertising, bulk purchase rebates, or costs of featured placement?

Research and test your assumptions. Do your homework before setting price. It’s one of the most critical things you can do to drive profitability.

3. Distribution Exclusivity Drives Profit
More distribution is not always better. Too many distribution channels can bleed profit through reseller price wars, price erosion and cancelled orders and referrals. Partnering with a couple of key distributors often can allow you to negotiate better terms.

Consider Apple or Estee Lauder. They are maintainable high-profit brands and they have controlled distribution. The key message here: getting more customers is not the goal – achieving more sustained profit is.

4. What Gets Measured Drives Profit
Peter Drucker is famous for his quote: “What gets measured gets managed.”

In addition to the usual operations measurements and KPIs, expanded measures driving profitability can include CPO (“Cost-Per-Order,” inclusive of advertising, fulfillment and expected returns, chargebacks, and bad debt), Ad Allowable (the maximum you can spend on an advertisement and expect breakeven), MER (media efficiency ratio), and (my favorite) projected lifetime value (LV) given return rates and reorder percentages.

The above are good examples, but many more measurements can apply to different industries.  A good starting point is kpilibrary.com.

5. Consumer Demand Drives Profit
Many companies focus their completive strategy on payment terms and offers. This is often a major factor in start-up company failures.

If you agree to payment on net-30 terms, it will become net-60, which inevitably becomes net-120. Pursuing overdue accounts will often interfere with generating more sales.

To avoid a cash flow crunch, focus on prepayment strategies. And, focus on creating end-user demand so you can command good terms. Invest money and time into strategic marketing. Public relations can also help tip the balance in your favor. The key message here: consumer demand gives you the ability to negotiate better terms.

6. Pareto’s Law Drives Profit
Is being busy the same thing as being productive? Of course not. And I am not going to say something like work smarter, not harder. The question to ask is are you working hard on the right things?

The 80/20 principle, also known as Pareto’s Law, states that 80% of your desired outcomes are the result of 20% of your activities.

My key message here is to take a weekly break from your usual activity and assess if you are spending your efforts in the most high impact areas of your business. What 20% of your customers/products/regions are producing 80% or more of the profit? What can you do with this information?

7. Firing “D” Customers Drives Profit
All customers are not created equal. I learned a long time ago the A-B-C-D rating system for clients. And what is this system? Awesome, Basic, Can’t Deal With and Dead!

If you assess the profitability of each client – the winners for your company are A’s and B’s.  Those who require the most service time, who always want a better price, and who do not understand the value of your product or service are always C’s and D’s.  And C’s and D’s are not profitable clients.

If possible, put high-maintenance, low-profit customers on autopilot. Or fire them. The easiest method of firing is often a price increase. Another method is to introduce them to another provider that will can them better.

Another perspective here is to understand that A clients will most often refer A clients.

8. “Tempering Perfectionism” Drives Profit
Perfect products delivered past deadline kill companies. Over promising while striving to be perfect kills customer trust.

In the software world, it is better to have a good-enough product delivered on time. Wikipedia defines the “minimal viable product” philosophy as “that version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort.” Reid Hoffman, the co-founder of LinkedIn, has been quoted, “If you are not embarrassed by the first version of your product, you’ve launched too late.”

I am not advocating the delivery of inferior products or services, but that perfectionism can cause companies to miss opportunities that impact profitability.

Products and services can be fixed as long as you have cash flow. Bugs are pardoned, but missing deadlines is often fatal. Temper your perfectionism.

Conduct a focused brainstorming session to explore what your company can do to fully leverage the power of each profit driver. And then start working through them during your weekly advisory council meetings or next quarterly/annual planning session.

Can you drive consistent profitability or increase it dramatically in the next quarter? Contact me to discuss how to implement these eight profit drivers in your organization.

© 2015-2020 David Paul Carter. All rights reserved.

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