Show Me the Money!
The Power of Information

The Profit Analysis - Customer View

When most business owners think about profitability, they think about accounting sheets that show “revenue minus cost.” That's all well and good, but that's only a macro view of your business. It's time to dig in and truly know where your money comes from. Are all of your products profitable? Do all of your customers contribute to your bottom line? These are the types of details a business should get into to truly know where the money is and whether you're truly maximizing your bottom line.

I was once handed a large database of information containing a log of customers and sales of products to customers. I was asked to “see what I could find out from the data.” As a reality check, all projects like this begin the same way; you must clean the data. This can take several hours. I mention this only because it's a portion of time that many people fail to consider. Now, on to the fun stuff!

Skipping the details of Excel manipulation and pivot tables etc., the general idea is to look at the data in several different ways to see if it tells a story about the business. In this case, the data was examined in relation to the different products offered by the company and the different customers of that company. This newsletter will cover the customer analysis and my next newsletter will cover the product analysis.

Note: since the graphs are rather detailed, click here to see them in PDF format while you read this study.

This particular company has upward of 1500 customers (the names of which have been jumbled to protect their privacy for this newsletter but you'll learn the concepts just the same). The contribution to the company's profit has been summarized in a graph showing the best customers first. (See graph 1). As you can see, most of the company's profit is coming from a small portion of their customer base, yet the company was providing the same level of “account management” service to all customers. Based on this result, the company opted to provide three levels of account support (grouped as A, B and C in the graph) and even outsourced the service to group C.

In graph 2, we look at the same data another way and can see that 74% of customers contribute a small profit and there are several customers actually producing a loss and eating into the company's overall profit. Zooming in on the “A” customers (graph 3), we see that the top 10 customers actually account for 47% of the total profit and the top 20 account for 64%. Taking a better look at the “B” customers (graph 4), we see that this large chunk of customers only contributes about 9% to the total profit. Don't even get me started on the “C” customers!

I'll conclude this study with a graph of the 50 most unprofitable customers. The 10 worst make up 80% of the total profit loss. Now, those customers definitely need to be reconsidered!

You can also look at your products using the same type of ABC analysis. In my next study (below), I'll do exactly that, so read on!

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The Profit Analysis - Product View
The Power of Information

When we left our study (above), we had analyzed a great deal of customer data to determine who was profitable, by how much, and who we really needed to consider “losing” as a customer. Now let's look at the same data from the PRODUCT view.

Let's dig in and see which products make the most money! Do all of your products contribute to your bottom line? These are the types of details a business should get into to truly know where the money is and whether you're maximizing your bottom line.

I shall again skip the details of the Excel manipulation and pivot tables etc., as that would bore even the best of my friends. Like the last newsletter, since the graphs are rather detailed, click here to see them in PDF format while you read the newsletter.

The first graph shows us a frequency chart, illustrating the number of products which produce a profit value per unit in a certain range. For example, we see that 52% of products produce a profit of zero dollars or LESS. Oh-oh! 29% of products produce a profit between zero and $20,000, 12% produce a profit over $100,000 (excellent!) and a small number sit in the middle range.

In graph 2, we look at the same data another way and can see that 80% of the total profit comes from about 40 products. We'll call these the A products.

In graph 3, we look at what we'll call the top B products. The 50 most profitable products after the A products will account for the next 15% worth of profit for a total of 95% of the total profit. Recall that the A products represent the first 80% of the total profit.

I'll conclude this study with graph 4 of the unprofitable products. We'll call these the C products. This graph shows exactly which products are the loss leaders. Unless these products are linked to some hugely profitable customers who really need them, I'd say it's time for these products to be phased out. Consider taking the analysis just one step further to map the most unprofitable products to the most unprofitable customers. Those are prime targets to improve the bottom line (graphs 5 and 6 for those of you who are adventurous).