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Time to audit your customers?

Do you know which of your customers are profitable for you and which are not?  Yeah, if you look for them, you’ll probably find a few (hopefully only a few) that really aren’t contributing anything to your bottom line.  So how do you identify them?  And once you identify them, what can you do about them?  For more on this, please read below.

At least once a year, it’s a good idea to audit your customer list looking for customers who are only marginally profitable or even unprofitable.  Ideally, you would have a system in place to continuously monitor profitability by customer.  If you know where your Gross Profit Margin needs to be on a companywide basis (as you should), then you’re simply looking for those customers whose individual Gross Profit falls below the companywide level.  If necessary to do this, ask your accounting firm for help.  It will be worth the expense.  Once you know which customers are unprofitable, you can either take steps to improve their profitability, or if that’s not possible, politely suggest that they would be better off being someone else’s customer.

As part of this exercise, you should also look for customers who are just a bad fit for you.  They are the 20% of your customers who cause you 80% of your customer service headaches.  These are the ones who, no matter how hard you try, you just can’t seem to satisfy.  They can demand disproportionate amounts of attention, and they can cause stress and anxiety in your organization (read unhappy employees) . . . all things hard to quantify in dollars and cents, but very real cost factors nonetheless.  Even if they are profitable customers, you have look at it from a cost/benefit point of view.  Are they really worth the stress they cause and would we be better off redirecting the time we invest in them to a more productive activity?”

It may sound like I’m being very cavalier about how we treat our customers.  I’m not.  Customers are pretty tough to come by these days, as we all know.  I’m not suggesting that we send a customer packing the instant we see that customer’s profitability start to fall . . . there may be all sorts of valid reasons to hold onto that customer.  But I am suggesting that we be aware of it, ask some questions about why it’s happening, and make a conscious, informed decision.  Likewise, I’m not suggesting we should cut a customer loose the first time we have a customer service issue.  But when some customers stand out as having chronic customer service issues, we have to look at whether or not the customer’s expectations and ours are in sync, and if not, we have to question if we’re really good long-term business partners.

If you’ve never done a customer audit as I’ve described here, you should.  You almost certainly have customers who are eroding your profitability and consuming more than their share of your resources.  If you don’t know how to find them or where to look, call me.  We should talk.

 
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“Know when to hold ‘em, know when to fold ‘em, know when to walk away, know when to run.”

Walking away from a sale is something that is tough for most business people to do . . . particularly in a tight economy when selling opportunities may be few and far between . . . but sometimes it’s the right move.  A business is set up to effectively and efficiently serve a certain market segment in whatever way the demands of that market segment require.  In other words, it is set up to deliver certain products or services with specific pricing, delivery schedules, payment terms, etc.  However, sometimes an opportunity presents itself that doesn’t fit neatly into the way our business is organized.  Should we take it?  For more on this, please read below.

Awhile ago, I heard a presentation on pricing.  In that presentation, the speaker admonished his audience to know your “Kenny Rogers” . . . the point at which a price gets negotiated down and passes from profitable to unprofitable.  More broadly, it’s the price point at which making the sale is no longer attractive.  The old pricing joke is, “Sure, I lose a little on every transaction, but I’ll make it up on volume.”  You better know where your Kenny Rogers is, and painful as it may be, walk away if your customer is trying to push you beyond it.

Think of the big box stores like Walmart or Home Depot.  They are famous for demanding deep discounts from their suppliers.  More than one of those suppliers went out-of-business because they were seduced by the promise of huge volumes and allowed themselves to be pushed below their Kenny Rogers.

But the Kenny Rogers concept doesn’t apply only to pricing.  It can apply to any of your normal business practices.  For instance, let’s say your normal payment terms are net 30 days.  What do you do when you can land a very large new customer, but that customer demands 120 day terms?  Or let’s say you’re set up for 2-week delivery times.  Now comes a high-volume potential customer who requires next day delivery.  Do you take it?

There are no right or wrong responses to these situations.  As business people, we need to recognize and seize opportunities that come our way.  However, when the opportunity requires that we step outside of our normal operating parameters, there’s probably a Kenny Rogers in there someplace and we need to make sure we’re not being asked to go below it.

Opportunity almost always carries some level of risk, and we need to be prepared to evaluate whether the risk is worth the reward.  But let’s not get caught betting the whole ranch when we thought we were only betting the south forty.   Knowing your Kenny Rogers will prevent that.

If you don’t know where your Kenny Rogers is or how to find it, call me.  We should talk.

 
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“The result of leadership is a group of people working toward a common goal because they want to, not because they have to.”

This is only one quote on leadership among hundreds, or more likely, thousands.  There is probably no other concept in business that’s gotten as much attention as leadership.  But what is it?  Most of us think we know it when we see it, but it shows up in so many diverse situations and in so many different styles that it’s difficult to give it a succinct, one-size-fits-all definition.

My trusty dictionary defines leadership this way:

  1. the position or function of a leader
  2. the ability to lead
  3. an act or instance of leading
  4. the leaders of a group

Not really very helpful, is it?

I think the quote at the top is correct in terms of an outcome of leadership.  The outcome has to be to give people the confidence and desire to work together toward a specific goal.  But what does it look like in action?  As it turns out, it has hundreds and thousands and millions of looks.  That’s why it defies definition.  However, there are a few characteristics that seem to be common among great leaders.

First, to be a great leader means being authentic, being yourself.  You can’t fake it.  You can’t imitate someone else’s leadership style.  You develop a style of leadership that reflects who you are . . . your personality, your values, your way of communicating.  Great leaders come in all sorts of packages.  Some are quiet and thoughtful, some are brash and commanding, some are humble, some are arrogant.  They all can work.  So don’t try to fit into somebody else’s package.  Work on developing your own.

Great leaders tend to be great communicators.  If your people are going to follow you, they need to know where you want to take them, why you want to take them there, and if they go there with you, what’s in it for them?  Great leaders are good at communicating all of that fully and honestly.

And great leaders understand that their primary responsibility is to help those around them succeed.  Leaders who put their own image and their own welfare above that of their organization will never rise to greatness.

When an organization is not performing the way it should . . . when there is uncertainty, confusion, or doubt about the direction it is heading . . . leadership is at least part of the problem, if not all of it.  Have you looked over your shoulder lately to make sure your people are following you?  If you have, and don’t like what you see, call me.  We should talk.

 
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“Permitting colleagues to participate in decision-making is not so much a favor to the participants as it is to the executive.”

The days of the boss hurling down lightning bolts while his employees scurry to do his bidding are long gone.  Employees today are better educated, better trained, and have access to more information than ever before.  They have insights as to what’s working well and what’s not.  In short, they are smart people who expect a seat at the decision-making table.  If they are denied that seat, a number of things are likely to happen, and all of them are bad.

First, the best employees will leave in favor of businesses that value their input.  Then the remaining employees will not enthusiastically support decisions in which they had no part.  Or worse, they may use passive-aggressive behavior to subvert such decisions.  On the other hand, an inclusive decision-making process carries a number of positive outcomes.

The most important outcome is that the executive gets the brain power of some really smart people who will express views, opinions, and ideas that s/he may not have considered.  Job satisfaction goes up because people want to know that their views have been heard and valued.  And implementation is more robust when employees are part of the process and take ownership of the decisions.

The trick in all of this is to create an atmosphere of inclusion and trust.  You don’t have to accept the ideas, opinions, and points of view your employees express, but your people need to know that their views are valued and will receive due consideration.  They need to know that you’re actually listening to them, not just hearing them . . . and there’s a big difference.  Hearing is just your brain acknowledging sound.  Listening happens when you push out distractions, focus on what is being said, and try to gain understanding.  Developing good listening skills takes some effort, but there’s a big payoff in better employee relations and communications.

The one drawback to all this inclusion stuff is that decisions made with input from lots of people may not be as elegant and precise as a decision formulated by one person.  Still, it’s far better to have an imperfect decision perfectly implemented than it is to have a perfect decision poorly implemented.

 
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“Have your children go work for someone else before they work for you.”

Some small business owners dream of creating a “family business,” that is having one or more other family members actively engaged in running the business.  It’s a romantic notion and very compelling to some . . . Mom keeps the books, Sis and Little Johnny do a variety of chores around the place, and Dad leads the whole happy parade.  Ah yes, Americana at its best.  But is that a realistic vision?  Or is it just a pleasant passing thought that shouldn’t be taken seriously?  If you are considering bringing a relative into your business, or have thought about it in the past, please read below.

“Have your children go work for someone else before they work for you.”

That was a headline in a recent Daily Herald special section on family businesses, and it’s not a bad thought.  But if it were me, I would have left off the “before they work for you” part.  If you’re thinking about bringing a relative into your business, I have just three words of advice for you.  Don’t do it.

I have spent a career trying (with only limited success) to convince small business owners not to bring relatives into their business.  It’s a nice idea, but a nice idea that’s fraught with problems and risks.  No doubt there have been (and continue to be) spectacularly successful family businesses, but for every one of those, there are probably ten or more that aren’t so successful.  They don’t necessarily fail outright, but they are dysfunctional on some level.  It’s just that having relatives involved brings a dynamic to the business that is usually not helpful, rarely necessary, and sometimes even destructive.

Consider the first and most obvious problem.  Let’s say you bring your son-in-law into the business.  You thought the job you gave him was a good fit for him, but after awhile, it’s obvious the arrangement just isn’t working.  So you have no choice.  You have to let him go.  Suddenly your daughter won’t speak to you and Thanksgiving dinners aren’t much fun anymore.

Or consider how difficult it will be to keep talented people on your team once they realize that the top jobs are always going to go to a family member and that they have the wrong last name for any hope of advancement.

Sibling rivalries are not uncommon in family businesses, and those can have all sorts of unwanted consequences.  Then there’s the problem of succession planning.  What happens when one sibling learns that another has been anointed the Chosen One to lead the company after the patriarch (or matriarch) steps down?

Relatives may feel privileged, or they may have an inflated sense of their worth or their importance.  They will wield power and influence beyond their station (even if they don’t intend to) just because of their relationship to The Boss.  The list goes on, but the point is, a business owner with relatives in the business can become trapped between doing what’s best for the company and its customers on one hand, or keeping peace in the family on the other.  So why would you want to invite that sort of dilemma on yourself?  The best way to avoid business/family conflicts is to keep the business and family separate.

Is my warning too late?  Do you already have relatives in the business that are causing some unforeseen problems?  Call me.  We should talk.

 
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“You can’t manage what you can’t measure.”

“You can’t manage what you can’t measure.”

“What gets measured, gets done.”

Those are two complimentary management axioms, and they both happen to be true.

Take the first, “You can’t manage what you can’t measure.”  It’s pretty hard to argue with that.  For instance, how could we manage our receivables without a measurement of some kind.  We couldn’t.  So we manage them by “days outstanding” . . . 30, 45, 60 days, or whatever the standard for your company is.  You can’t manage to a specific result unless the result is specific and measurable.  Or consider how you manage your payroll.  You might have a target for how much overtime will be allowed for any given pay period.  Or you might want to keep your total payroll below a certain percentage of sales.  Again, there must be a specific, measurable goal.

Then take a look at the second axiom, “What gets measured gets done.”  Without specific measurements, goals become fuzzy and lack commitment.  Let’s say, for instance, you announce that you want the company to grow next year.  That’s great, but without a specific target, that could mean anything.  Are we trying to grow by one dollar?  By a million dollars?  By 20%?  And obviously, the goal has to be tracked and communicated regularly.  If you aren’t telling your people where you are against the goal you have set, they will assume that you’re not tracking the goal, that you’re not paying attention, or that the goal just isn’t all that important.  Besides, if they aren’t being told regularly how they’re doing against the goal, how can they possibly help you achieve it?

Some goals can be tracked straight off your standard financial reports.  Others may require a more creative approach.  This is where Key Performance Indicators (KPIs) can be very useful.  For example, if you’re a service company, you might want to track the number of complaints you receive per $1000 of revenue as a quality control measure.

The point is, if something is important enough to be set out as a goal or objective, then it is important enough to carry specific measurements of success, and important enough to regularly communicate those measurements to your people.  Otherwise, what you’ve got is not a goal at all . . . it’s just a wish.

If you’re “not a numbers guy” and you don’t have effective measurements in place to help you run your business, call me. We should talk.

 
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“Goals produce results, not activities.”

Our last posting talked about consistency.  We talked about identifying “critical success factors” . . . operating principles that, when applied consistently, are at the core of a company’s success.  But operating principles are only half the equation.  They are the front end, the input side of things.  They are the consistent activities that produce a consistent result.  A consistent result, yes, but is it necessarily the result we want?  It may not be if there is ambiguity, confusion, or disagreement about what we’re trying to achieve.  For more on this, please read below.

“Goals produce results, not activities.”

We might go that quote one better and say, “Well-defined, highly focused goals produce results.”  A well-crafted set of operating principles is a good start, but they’re only useful if they are molded and targeted to produce a very specific result.  After all, nobody cares about all the great, really clever stuff we did to achieve the result.  They only care about the result.  In fact, conventional wisdom tells us to always begin with the end in mind.  So we should start with the result we want, then work backwards to design the operating principles that will produce that desired result.

Think of this as your North Star.  It’s that reliable navigation aid that you can count on to guide your thinking, your planning, and your decision-making.  It’s that thing that sets you apart, that you know you can deliver, and the marketplace trusts you to provide.

In our last posting, we noted that operating principles are the “rules of the road” for a business.  They are the way we do things, the way we conduct our business, not just this year, but every year.  Year after year after year.  Therefore, the result produced by our operating principles must also be consistent year after year.  We’re not talking about vision, or mission, or values here, nor are we talking about a strategy.  We’re talking about results that define us in the marketplace . . . results that are our identity.  They are our North Star.  They are, in fact, our “competitive advantage.”  The Southwest Airlines operating principles we discussed in our last posting are all aimed at delivering their competitive advantage . . . low cost airfares.  It’s the North Star that guides everything they do.

Some other examples.  Imagine a high school that graduates 98% of its senior class every year, year after year.  The challenges may be different every year due to changing budget requirements, staff turnover, changing student demographics, etc., but not the results they expect.  A 98% graduation rate is who they are.  Failure is not an option.  It’s ingrained in their DNA.

Or think of a general contractor who claims to bring his projects in on time and on budget, always.  His clients have never been disappointed by missed deadlines or budget-busting surprises.  Never.  Not once.

So sound operating principles deliver a specific, desired result, which is your North Star (competitive advantage).  Sounds easy, but sometimes our North Star doesn’t shine so bright.  If your North Star is a little hard to locate, or if it’s a little fuzzy and difficult to follow, call me.  We should talk.

 
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“We are what we repeatedly do. Excellence, therefore, is not an act, but a habit.”

In his outstanding book, Great by Choice, Jim Collins relates the story of Howard Putnam, a former CEO of Southwest Airlines. Putnam institutionalized the Southwest Airlines’ “recipe” for success. His “recipe” was not a strategic plan or a vision or a mission statement, but a carefully thought-out list of operating principles. That list included:

  • Utilize the 737 as our primary aircraft.
  • Continue high aircraft utilization and quick turns, ten minutes in most cases.
  • Continue low fares and high frequency of service.
  • Stay out of food services
  • Keep it simple. Continue cash-register tickets, no seat selection on board, etc.

There was more on Putnam’s list, but you get the idea. Collins refers to this kind of recipe as a SMaC which stands for a Specific, Methodical, and Consistent set of operating principles. Others might refer to these as simply “critical success factors.” Either way, these are the essential things we do that have made us successful and will continue to make us successful as long as we continue to follow them. These are not just the “operating rules of the day.” These are long-term rules for how we run our business that may stay in place for many years, even decades. Sure, markets change, and over time, some of our operating principles may have to change too. But think of it a little like the U.S. Constitution. Yeah, we can amend it, but it’s served us very well for a long time so let’s not change it on a whim. Let’s change it only when there’s a clear and compelling reason to do so.

To consider what should be in your “recipe,” you need to clearly understand what you do (or how you do it) that your customers value, directly or indirectly. For instance, Southwest passengers probably don’t care that the airline has standardized on the 737. But by doing that, Southwest only has to train pilots on flying one airplane, only has to train mechanics on maintaining one airplane, and only has to inventory parts for one airplane. That all saves money and helps the airline to keep fares low. And Southwest passengers do care about low fares.

A well-crafted recipe can be a great template to help your decision-making process. Will the solution you’re considering to a tough problem conflict with your “recipe?” If you take advantage of an opportunity that presents itself, will the result violate any of your operating principles?

Obviously, a “recipe” like this only works if it is communicated effectively and frequently to everyone in your organization . . . they need to internalize it. They need to be able to recite it asleep and blindfolded. And they can’t just hear the words, they also need to hear the music. They need to understand how these rules support the way we do business and why it’s important to follow them consistently. They need to understand why flying 737s helps us deliver on our promise of low fares.

So put on your Betty Crocker hat and draft your “recipe.” If done well, it has the potential to give you and your entire organization a singularity of purpose and vision that will be transformational.

 

 
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“A ship in port is safe, but that’s not what ships are built for.”

Many companies that survive an economic downturn do it by cutting everything that doesn’t keep the lights on and the doors open.  In that condition, they are treading water.  They may avoid catastrophe, but they’re not going anywhere.  The company is set on “idle.” 

Allowing the company to idle until the trouble passes might be the right thing to do, but sometimes companies continue to idle even though the worst of the trouble has passed.  Why?  In most cases, it’s because the CEO doesn’t trust that business conditions are really improving.  Maybe we’re experiencing only a brief lull in the storm before it resumes its full fury.

People . . . and therefore, the corporations they create . . . are at their core, cautious and conservative.  We have a sense that doing nothing is a safe bet.  It’s not.  Doing nothing is a conscious choice, and it may not be the safe choice.Our business history is littered with examples of companies standing by while smart, aggressive competitors swooped in to grab market share and competitive advantage.

Obviously, perilous economic times call for some degree of caution.  But beware of too much caution.  If you keep your ship in port too long, you’ll wake up one morning to find all the cargo is being carried by a competitor.

 
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Marketing 101e

So far in this series on marketing, we’ve discussed three fundamental marketing questions:

–          What product or service do we want to sell?

–          What “competitive advantage” separates us from our competitors?

–          Who is uniquely suited to buy from us (who is our “prime prospect”)?

Now, to conclude this series on marketing, let’s talk about a very powerful marketing tool, price. 

Too often we jump to the conclusion that our price has to be lower than the price of our competitors.  Not so.  Our price has to be seen as a better value than that of our competitors, but that’s not the same thing as cheaper.  For instance, if our product is priced 50% higher than that of our competitor but it lasts twice as long, our product is the better value.

But price also has strategic value beyond dollars and cents.  Let’s say our company makes razor blades.  We can’t sell any razor blades unless our customers have the handle that holds the blades.  So we can put a very low price on the handle (or even give it away) because our customers only need one.  But now we have a captive audience that will need to continue buying replacement blades for a lifetime.

Pricing also has great impact on the way we offer our product or service.  Maybe our competitor “bundles” the products or services we both offer . . . that is, products A, B, and C come as a set.  To buy one, you have to buy them all.  Our response might be to offer those products a la carte . . . you can buy one individually or in any combination you want.  In similar fashion, our competitor might sell his product in packages of 10.  So we might appeal to smaller users with a package of 5 or to larger users with a package of 20.

The list of pricing strategies is endless.  But price (and every other marketing consideration, for that matter) needs to be set so that our sales force can sell the way our customers want to buy.

In the last several postings, we have barely scratched the surface of marketing, and there is certainly a lot more to it than the few points we have discussed.  For a more in depth view of marketing, pick up a copy of “Duct Tape Marketing” by John Jantsch or “Meatball Sundae” by Seth Godin.  Both are excellent books and both are aimed at small businesses who need to practice sound marketing on a limited budget.  And for a great look at how to distance yourself from your competitors, pick up a copy of  “Creating Competitive Advantage” by Jaynie Smith and William Flanagan.

 
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