According to Randy MacLean of Waypoint Analytics, there are too many sales where expenses exceed gross profit. “There is no correlation between gross margins and profit,” he told distributors at the Advanced Profitability Improvement Conference in September in Scottsdale, AZ.

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So what happens? Where are the profits going? MacLean outlined five ways profit disappears before reaching the bottom line:

1. The cost to serve a customer is not in line with price. It’s not always easy, but it is critical that distributors balance their pricing with cost-to-serve.
2. Companies don’t know where their profits are made or lost. MacLean advocates getting more information on how profitable customers are on a product-by-product basis.
3. Growth and gains are weak because companies are not managing their deltas effectively. In other words, they look at the data, but they don’t often look at how it has changed over time. MacLean advises companies look at what is moving forward – or growing – and embrace or do more of that. On the flip side, look at what’s declining or holding you back, and cut that from the business or fix it. “What we’re supposed to do every day is work to make the organization better,” MacLean said.
4. Distributors are paying people to preserve the status quo. Even if that was not the original intent of a compensation plan, many are often designed in ways that encourage salespeople to continue doing what they are doing without regard for the impact on the overall bottom line.
5. Nothing in distributors’ current systems or processes detect, prevent or manage these problems.

This supports the premise of Jonathan Byrnes’ book, Islands of Profit in a Sea of Red Ink, which found that 40 percent of every business in any industry is unprofitable and 30 percent is so profitable it subsidizes the rest. Byrnes also spoke this month at the Advanced Profitability Improvement Conference. (Hear more from Byrnes on this subject in MDM’s recent four-part Islands of Profit Webcast Series, now available on DVD.)