Few enterprises truly understand the actual profits generated by the individual sales they make. Most metrics for sales effectiveness are monitored by reviewing top-line revenue results. Yet, the most critical determinant of on-going business viability is understanding what revenue actually drops to the bottom line after all costs have been taken into account. You must understand what profit is generated by sales to each of your clients. Then, consider the benefits, vulnerabilities and the cumulative impact these sales have on your business. Knowing the breakdown of the profitability by individual sale can have a significant impact on your ability to achieve your business goals.
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1. Understand the Impact of Profit Per Sale.
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Many expenses go into determining a company’s profitability. The same is true for determining the profitability of a sale. Each sale has multiple components impacting its final profit. You should consider your total cost of goods sold, including investments in promotion and delivery expenses. Factoring in the costs associated with the staff time required to generate a sale is a must, too. Unfortunately, few companies consider all these expenses when developing their marketing and sales strategies. Whether you are working on growing your business or struggling financially, the impact of the true profits generated by each individual sale takes on greater importance.
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2. Know Your Profit Per Client.
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Frankly, not all clients are worth the effort to generate the sale. Sometimes, your business growth goals mean you also are growing beyond clients you have historically served. This transition period is a very vulnerable point for any enterprise. It is also very stressful, because you might be wrong and wind up losing a client who could have provided even more revenue value if you had not been afraid to maximize your relationship.
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Carefully study the costs associated with serving each client. Perhaps you have long-term clients you like personally, but if you have not taken the time to explore the costs of the sale, their value to your business may have changed dramatically over the years.
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Before abandoning these clients, try to identify options to trim expenses without jeopardizing quality. If they are not generating any real profit to your company, it may be time to move on.
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3. Review Your Customer Segments Revenue.
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Using a target-marketing approach to grouping your customers into similar client segments provides you with a more detailed understanding of what is working and what is not. The key to effective target marketing is to focus your sales activities and expenditures toward those type of customers who can best be served by your enterprise, who will stay with you over the long term and who will generate solid profitability.
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4. Evaluate Individual Sales Profitability.
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There are two ways of looking at your sales profitability data. One is by the individual clients. The other is by combining clients using some specific target marketing components. Grouping clients by similar characteristics makes it easier to identify trends in the data that you can use to assess the profitability of each of these major segments.
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There are many options for grouping your customers into segments. For a B2B client, you could group them by industry sector, number of staff, location, etc. For a B2C customer, you could group them by where they live, personal attitudes, age, family size, income level, etc.
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If Client Segment A generates solid profits for you, but all of your marketing efforts are being devoted to Client Segment B who are barely break-even, the choice is obvious. You must retool your marketing and sales activity to attract more prospects from Client Segment A.
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Knowing the breakdown of the profitability by individual sale can have a significant impact on your ability to achieve your business goals.
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5. Monitor Individual Client Profitability.
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A complete review of your customer mix and sources of sales will reveal your potential vulnerabilities if market conditions change. In today’s complex and competitive marketplace, it is not enough to look only at your total overall sales. If you have one customer who generates more than one-third of your sales, you are in an extremely vulnerable position if you lose that client to a merger, change of staff or if the business closes. Controlling and monitoring your client profitability and cost of sales allows you to take corrective action before your company’s survival is at risk. This takes on even greater importance if you are overly dependent on key clients for your profitability.
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6. The Impact of Pricing on Profitability
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A close companion to client profitability is understanding the impact of various pricing strategies on the perceived value of your goods and services, and how they intertwine in attracting the customers who will buy from you. Engaging in discounted pricing strategies often attracts customers who are buying from you based on price, not your value. If you are in a service-oriented business, this can be a slippery slope. You may get clients who keep you busy, but who do not generate the profits you need to build a sustainable enterprise or build your net worth. It is a delicate balancing act, but one you must realistically consider given your business objectives.
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7. The Impact of Strategy on Profits
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You must also consider the financial consequences of your business direction and your vulnerability to setbacks. This assessment allows you to make better business decisions and to set a more realistic strategic vision for your organization. “Finding a lane” or picking your niche through target marketing must also incorporate a true understanding of the costs of reaching them, as well as their ability to add to your bottom line in a meaningful way.
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Final Thoughts
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Reviewing the trend information for each of your major client segments is a highly impactful approach to revaluating the effectiveness of your sales and marketing efforts. It removes your emotions and relationships with your clients to allow you to be more detached in considering their impact on meeting your business objectives. They no longer become just people you like, but a bigger grouping of customer segments that impact your future costs and business growth. If you are not attracting the kinds of clients who generate the profitability to move your enterprise forward, it is time to reconsider all of your sales and marketing efforts.
