In an on-demand MDM webcast, Jonathan Byrnes, distribution veteran and founder of the SaaS profitability analytics firm Profit Isle, argues now is a once-in-a-lifetime opportunity for distributors to work on elements of their businesses that are often left on the back burner. In the wake of COVID-19 disruption, people are looking for new ways to do things and are more open to change. One of those areas of change that can have a huge impact on business is to build customer loyalty through profit segmentation, Byrnes says.
Rather than fall back on “well-intentioned chaos” that ensues from the standard first-come, first serve model, distributors who operate on a strategy of profit segmentation can figure out in advance an executable plan that is clear and direct with customer expectations. “By understanding what to do with different customer sets based on their profitability and always keeping your promises [distributors can] emerge with stronger cashflow, stronger profitability and customer loyalty that will last for years and years beyond this crisis,” Byrnes says.
Using Profit Segmentation to Drive Decision Making
In the webcast, Byrnes details what he calls five points to the “customer profit segmentation star of value.” The five essential points are:
1) Profitability Prioritization
Prioritize customers by their profitability. Figuring it out sounds simple: The difference between revenue and profitability costs equals profits, but that doesn’t account for the profitability of each line item in a transaction. Some items are highly profitable, while others are not.
Create a P&L that carefully assigns costs, rather than blanket allocations, Byrnes says. Then, to make sense of all the data, look at profits versus revenues. For example, Byrnes segments customers into three areas:
- Profit peak customers (high profit, high revenue). “Profit peaks customers, you want them to be extremely loyal,” says Byrnes. “You want to double down and focus your resources here: Extend their contracts, create a dedicated sales force that can integrate the companies and build real ties that generate extreme loyalty.”
- Profit drain customers (high revenue, low profit). It’s a perfect time to renegotiate these relationships, not focusing on pricing too much, but rather operational factors such as too frequent ordering or expediting, he says.
- Profit deserts (low revenue, low profit). These can be high potential, such as being a minor supplier to a big customer, but if not, it’s important to ratchet down costs in this category, adds Byrnes, through actions such as reduced supply or aggressive substitutes.
2) Emerging Channel Strategies
Protect your emerging channel strategies. “A lot of companies are investing heavily in digital and that’s really important to preserve,” says Byrnes.
He advises continuing to build digital channels to compete against Amazon and others who are more advanced in e-commerce and omni-channel capabilities. It is critical to long-term success against “increasingly dominating” digital giants. “Continue to invest so that after this you wind up in very good shape,” Byrnes adds.
3) Aligned Sales Compensation
Align sales compensation with your company’s strategy for each customer set. Pay plans are more effective when aligned with the company’s priorities, Byrnes says. This is done in four ways:
- Profit segment specialization. Understand that the different profit segments have different game plans.
- Prioritized profit segments. “To prioritize profit segments by doubling down on your profit peaks is the absolute most important thing you can possibly do,” Byrnes says. “And yet, most people get hung up on rectifying profit drains, which usually takes a long time.”
- Omni-channel management. Protect this from cost cuts.
- Rep capabilities profit map. Create a rep profit map that tracks overall performance, as well as by customer and/or product segments.
4) Smart Product Substitution
Demand management “is always a good thing, but it’s life or death these days,” says Byrnes. In times of supply disruption like now, it is essential to move customers to higher-profit product mixes and ensure high fill rates. Right now, he says, most reps don’t understand product substitutability by profitability level but they would be wise to have a working knowledge of this information.
5) Reduced Over-Ordering
One reason medical supply demand has spiked under COVID-19 is because of automatic replenishment systems overestimating demand, Byrnes says. There are two levers to over-ordering. The first one is hoarding in anticipation of shortages. Byrnes recommends distributors make allocations based on historical demand.
The second is unadjusted EDI algorithms. For example, a customer who needs 100 units of a product may have an agreement with a distributor for 80% of demand. But because this is not updated in the automatic replenishment system, the system sees the 20-unit gap and automatically re-orders to fill the gap — perhaps multiple times a day. The distributor’s system then notes the multiple reorders and in response estimates it needs many times more product from the manufacturer to meet need.
“You get shock waves of inappropriate product ordering that permeate the supply chains of product after product,” Byrnes explains. “Most supply chain people, in my experience, have never encountered a situation where they have to adjust their replenishment algorithms.”