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Business Observer Friday, Jan. 18, 2008 14 years ago

LASDAY: Segment to increased profits

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Client segmentation of "profitability" spotlights hidden costs and real profit. After adding back internal expenses, you should recapture lost billings.

STREET SMART MARKETING

Segment to increased profits

By Lou Lasday

Client segmentation of "profitability" spotlights hidden costs and real profit. After adding back internal expenses, you should recapture lost billings.

Profitability is at the core of all business drivers. Every aspect of the business enterprise, when diagrammed on the presentation board at top tier graduate business schools, is a potential center for profit. If not, "Profit Enhancement", then "Cost Reduction" which in itself is a valid opportunity for recapture.

Segmentation of this profit, is simply a management technique to first identify and than isolate various components or segments of like aspects of your enterprise for further study.

Gulf Coast corporations, large and small, are constantly searching for new areas of potential profit to report to stockholders, the executive committee, partners, bankers or in the case of some start-ups, maybe just to significant others! Regardless of your size, segmentation by profitability allows you a deeper look in understanding your real profit picture within your various departments, divisions, regions, partners or products.

Consider a non-traditional, fresh and much overlooked area of your own market segmentation. Ascertain which customers yield the highest "realized" profitability, after adding back meeting time, local travel, research, secretarial, assistant, folders, printing, telephone and more. Few professional service providers, light manufacturers, software developers and distributors have this insight into their own profit segmentation: profitability by customer or customer type in relationship to total all-staff, all-service cost invested. This understanding is critical for making immediate decisions as to future direction, as well as longer term strategic corporate initiatives. How else can you define the right customers to target and which customers to develop? Which customers to keep or turn away?

Why it matters

If you are a Gulf Coast products-oriented enterprise, your best customers are typically those customers who buy the most. That's because you tend to have constant product margins across product families. That seems logical.

However, with professional service providers and companies with differing product margins, a view only on revenue generated by customers is far too limiting. Understanding what services customers buy, and your internal associated costs against the sale, are strategic components to designing the most profitable business strategies. Don't delude yourself into thinking that your charge or commission is your real profit.

Law firms, of course, as a category tend to do the most complete tracking of service time rendered. How about financial planners, commercial real estate executives, community bankers, architects or the dozens of other service professionals who can't or don't keep time sheets or charge flat hourly fees, without recognizing internals.

Service companies frequently don't understand which customers cost more to serve than others, and which customers use fewer internal resources and are therefore more profitable. The type of financial information necessary to determine the real cost to service a customer is typically not available through your accounting department.

Realized profit

This type of identifying the components in realized profit can be a significant challenge to assemble. However, this detailed and involved process may possibly be the most critical determination to the success of your enterprise. If your Gulf Coast enterprise is a professional service organization without this specific knowledge, you're fighting the profit battle with one hand tied behind your back.

While the creation of this analysis may be complex, the benefit to your individual cost centers and ultimate bottom line will be colossal. At the very least, you will accurately identify costs that you pay for but do not recoup.

Understanding the principles of customer grouping and profit segmentation will positively tell you which customers actually yield the highest net realized profitability. And, that's the kind of business you want!

Lou Lasday is a corporate marketing advisor residing on Longboat Key. He has been a general partner of an Ad Age Top 100 marketing communications firm and regional president of the American Marketing Association. Mr. Lasday can be reached at [email protected]

TIPS

How to develop a true customer profitability segmentation model

Revenue by customer:

Identify all product and service income, less discounts or rebates if applicable.

Services delivered:

Categorize each and every activity from original agreement on up to follow-through client meetings.

Service cost drivers:

Identify meeting, travel and telephone time, concept, research, reprinting, and all effort on a "cost plus" basis.

Total cost by service:

Capture internal and external costs by time sheets or daily estimates, along with soft cost like assistant, secretary, gas, mailing and more.

Total cost by product:

Where an actual hard product exists, the net cost including pro rata development should be identified and assigned to purchasers.

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