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Cost Accounting 301—The new math

Shane Soule

Our industry’s default process to grow profit has three very basic macro levers: “increase sales,” “increase margin,” or “cut costs.” I put those in quotes because there rarely is a micro plan for the macro goal which results in lower ROI than you might realize. Previously I’ve shared how to find your top and bottom 15% of profitable business. If you now focus on improving the least profitable 15% of customers, you can improve net profit up to 40% which is a much higher ROI on your investment.

Here are some tangible steps to turn the profitability of these relationships around.

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Non-profitable customers (the bottom 15%)

Most of us look at volume, margin, and a “hassle factor” to rank our most valuable customers. When true costing identifies the least profitable customers, it requires you balance their willingness to pay with their cost to serve.

Lower their cost to serve: The lowest 15% are probably among the most disorganized. They likely require a lot of last minute, small orders that drive delivery costs per job higher than your other customers. These are not bad customers. These are customers you have not managed well to this point.

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Approach them with the metrics you have gathered and explain to them the cost per hour your vehicles and operation use. Every customer is different, so engage them each with a customized plan to help them help you. Some areas of opportunity could be to:

  • Combine deliveries of sections of homes.
  • Plan credit pick-up on final delivery of the job.
  • Work around shortages and add them to the next scheduled delivery.

If you offer free or discounted delivery, offer it for two to four deliveries to the job site, and then start accruing actual delivery costs ($200 to $500). Be sure to include credit pickups. It costs you the same delivery dollar whether you’re dropping off or picking up.

Raise margin: Recognize you will have some customers who can’t or won’t drop their cost to serve. In that scenario you must raise margin.

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Say goodbye: After working through 1 and 2, some customers fire themselves if they are unable to lower their cost to serve or increase their willingness to pay. They move their unprofitable business to your less savvy competitor who hasn’t learned these lessons. You will increase profit by not wasting resources on them, and invest those resources on more profitable business. Meanwhile, the unprofitable former customers drag down your competition.

Profitable customers (the top 15%)

Just as important as it is to reverse unprofitable business, you must understand and love on your most profitable customers.

Why are they so profitable?: Is it a willingness to pay (high gross margin)? Or are they doing something so well that it allows them to lower their cost to serve. Could you recommend it to other customers?

Sell them more: You always want to sell your customers more, but increasing sales to your most profitable customers is always a win.

Help them grow: Are there areas where you can help them be more profitable or more organized so they can build more homes? Are there developers you could connect them with to help them get more opportunities to build more homes? This is one of the best investments of time and energy you can make, and its sure to increase their loyalty too.

The nice thing about automating your data is you will track improvements to your customers’ profitability and simultaneously keep your top and bottom 15% list updated. With each success, you’ll improve your approach and become even more confident in your ability to increase profits while identifying the good and bad fits within your book of business.

 

Shane Soule consults with LBM and component companies to increase productivity and profits, and improve the experience for both customers and team members. Reach Shane at shane@shanesoule.com

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