Without change there is no innovation, creativity, or incentive for improvement. Those who initiate change will have a better opportunity to manage the change that is inevitable.
– William Pollard
When companies think about profitable niches, they typically think of selling a “hot, new product.” For the same investment, most companies could squeeze more profit out of their existing product line. By purposefully starving their least profitable products of resources to focus exclusively on the highest margin products, companies can dramatically improve their bottom line without having to add salespeople or find new customers. Put simply, identify the 20-50% of your product line that must “sell itself” and incentivize your sales force to concentrate on the remaining high margin products!
Business intelligence (BI) is a gospel best summed up as “the truth will set you free.” So often, companies are searching for a magic bullet that looks suspiciously like the one they used the last time. Sorry, but that one’s gone and this version’s not likely to be so obvious. New magic requires new insights based on ever-deepening truths. Hence, the most powerful magic bullets resonate with visibility into your company’s most granular level of data.
BI best practice exposes atomic level data to decision makers. If your company’s profitability is driven by top line sales growth, business intelligence
is the tool your program managers need for visibility into your most profitable and most unprofitable niches. The ability to shift resources from the unprofitable to the profitable niches depends on knowing the unfettered truth. If you can’t get that out of your current data warehouse – or if you don’t even have one – it’s time to revisit the BI
Think about it. Your sales force is essentially a fixed cost. They are going to spend their time selling. You hope they are finding new customers as well as servicing their largest accounts, but can they answer the following questions?
- Who is my most profitable customer?
- What is my most profitable product?
- What are my most profitable cross-selling opportunities in my existing accounts?
- Who are my most grow-able accounts?
Now, stop and ask these same exact questions about your unprofitable niches. If your sales force could clearly distinguish between pursuing profitable vs. unprofitable products, as well as customers and growth, what would the financial impact be
Let’s look at a simple but common real-life scenario. A major distributor has 3 products priced the same, 2 customers and 2 salespeople. In our scenario, the company sells every product, but not all are equally profitable:
Because the units sold (192) and revenues ($1,920) are equal, both salesmen look productive, However, Chris brought in 32% more profit than Pat! This is especially unfortunate when Pat actually set out to sell 85 units of Product 1, the lowest margin product. With the right information, Pat would know to concentrate on selling Product 3 while leaving Product 1 to “sell itself.”
Without profitability information at the individual product level, it’s extremely difficult to effectively shift resources to your most profitable niches. So this simple scenario plays itself out daily and the reason is simple:
- Salespeople, in particular, tend to be commissioned on the product selling price rather than the profit margin.
- Your pricing strategy may reflect yet a different component, most commonly known as “what the market will bear.”
- When the “market price” gets out of alignment with the actual product margin, then salespeople who are on commission will actively sell an unprofitable niche.
- The company loses twice, because they paid a high commission on a product that just doesn’t contribute much to the company’s bottom line.
Is this happening in your company? It doesn’t have to. The truth is not as elusive as it once was, nor is it as expensive as it used to be. The road has been paved with fairly mature BI product suites and a consolidated vendor market. Best practices let companies move forward with confidence as they start their BI journeys.
Companies seeking the next magic bullet will be best served by digging deep into their standard cost data to answer the nagging question – what can be gained by shifting resources from unprofitable niches to profitable ones? If the answer to that question has the potential to add even $200,000 to your bottom line, then you owe it to your company to ramp up your business intelligence initiative.
SOURCE: Business Intelligence: Identifying Profitable Niches
Recent articles by Janet Kuster, MBA, PMP, Christina Rouse, Ph.D.