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Firing Customers For Profit November 7, 2013

Posted by Tim Rodgers in Management & leadership, strategy, Supply chain.
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Businesses large and small generally work diligently to satisfy customers, and they’re frequently reminded that the cost of acquiring a new customer is much greater than the cost of retaining an existing one. Unfortunately many of those businesses fail to appreciate that each customer has an incremental cost, not just to acquire, but also to manage. It’s possible that an organization can spend more money to support a customer than what they get in return, which is obviously an undesirable situation.

Early stage companies are particularly susceptible to this kind of trap. In their eagerness to turn their ideas into revenue, they will often incur hidden costs in order to customize products and services for each potential customer. Any customer who is willing to pay looks like a good customer. Geoffrey Moore writes about this in his excellent book “Crossing the Chasm” (HarperBusiness, 1991). The danger is that the company loses economies of scale, leverage and re-use efficiencies, and ultimately the focus that defined the unique profit opportunity in the first place.

Unprofitable customers or segments can be hard to detect. It’s easy to add up the direct material cost of a single product configuration, but you also need to understand how much time your sales and support staff spend with a customer. Does your purchasing team have to manage unique suppliers? Does your quality team perform special tests or inspections? Your indirect labor may be spending a disproportionate amount of time dealing with requirements and requests from customers who squeak.

Unprofitable customers are not necessarily bad for the business. Moore writes about segments with “bowling pin potential” that may be a net loss today, but enable the firm to establish foundational processes, move up the learning curve, and leverage and grow in the future. These loss-leaders have long-term strategic value, but it’s important to understand and assess the investment in order to ensure the expected return.

Actually refusing to do business with a customer is extreme and could hurt your reputation, but consider ways to reduce the cost to manage a customer that isn’t currently providing a net profit or enables future profitability. The firm that fails to understand their “cost to serve” may find itself out of business despite many happy customers.

Business Development Revisited August 15, 2012

Posted by Tim Rodgers in International management, Supply chain.
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Earlier this year I wrote about business development as a possible new career direction (see Business Development, Not Sales). Lately I’ve been thinking about a generalized, logical processes for identifying and targeting new business opportunities, derived from my own experiences as a customer and a supplier.

The underlying question that must be considered for any new opportunity is the cost of the service (or product) provided. That may sound obvious, but I think there are a lot of people who still think that any revenue is “good” revenue. Certainly business development must be driven by the desire for revenue growth, but that growth should be profitable, either as an independent revenue stream, or because of its contribution to return-on-assets or other measures of financial leverage. A supplier may choose to provide a service that is not immediately profitable with the expectation that it enables a long-term revenue stream (for example, early entry to a rapidly growing new market or new technology), but that should be supported by a net present value (NPV) calculation.

For the sake of simplicity, I’m going to focus on suppliers of services, although I think the same guidelines apply to suppliers of hardware parts or products.

Generally, leveraging a current customer who is already using services from the supplier is easier and more profitable than trying to establish a business relationship with an entirely new customer. There are two directions to take when leveraging an existing customer:

1. New services at the same customer. The customer is already familiar with the supplier, and already has purchasing and supplier management processes in place. If the supplier’s performance has been solid, the customer may be open to suggestions regarding additional services, particularly if there are bundling benefits that lead to lower price and/or lower management cost on the customer side. For the supplier there may be additional benefits in reducing the cost-of-service (COS) by leveraging the overhead and assets required to support this customer.

2. Same services at a new customer, specifically where the current customer can provide a meaningful benchmark and/or recommendation. An example would be another division or business group within a large corporation. There’s less risk and a faster learning curve for the new customer because of the foundation established with the existing customer, and the supplier may be able to realize economies of scale by providing the same service to a wider customer base.

Regardless of whether the new business opportunity can be leveraged from an existing customer, the following questions determine the next steps in the process:

Is this a new customer? If yes, then identify reference contacts (internal or external) that can help communicate value and reduce the perceived risk.

Is the customer already buying this service? If yes, then winning more business requires replacing an existing supplier. Because there’s a natural resistance to change, this means offering something better, and that requires an understanding of the customer’s needs and how the supplier can offer an attractive alternative value proposition. If the customer is not currently buying the service from any external supplier, then the prospective supplier must create a business case that describes the benefits and helps address concerns, this time in comparison with an internal supplier of the service.

Is the supplier already providing this service? If yes, then the supplier should be able to identify opportunities to support multiple customers from the same assets and resources to reduce overhead and cost-of-service. If no, then the supplier must evaluate the incremental revenue vs. the cost to add the new service. Again, an NPV or similar analysis is essential.

That’s how I would do it.

Business Development, Not Sales January 16, 2012

Posted by Tim Rodgers in Supply chain.
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Recently I had an interesting conversation with a former colleague who suggested that I consider another career change, this time to a job in business development representing a supplier or engineering service provider. After a few minutes I realized that it’s not an entirely ridiculous idea; I’ve got a lot of experience with outsourcing, both as a supplier and a customer, and I guess I have the kind of social, outgoing personality that people associate with that kind of position. However, my initial reaction was reflexive and negative, and I’ll bet there are a lot of engineers and other technical folks who would respond the same way.

I suppose this reaction derives from the stereotypical salesperson who tries to force-fit something from the current catalog of available products and services, using hard-sell techniques to close the deal. Unfortunately many of these people have a limited technical background, and probably just enough jargon to get their foot in the door. They lack credibility with skeptical engineers, and (more importantly) they lack the understanding to solve real-world problems by modifying or re-designing the offerings in their catalog to better meet their customer’s needs. It’s not a welcome phone call from one of these people, unless by some amazing coincidence you happen to need exactly what they’re offering at that point in time. I’m sure many of my friends and colleagues would look at me differently (and not in a good way) if I started down that career path.

Business development seems to be a relatively new way of thinking about sales, focused more on finding new customers than servicing existing ones. It sounds like something that includes hustling for leads and cold-calling, looking for an opening.

That’s the stereotype, but maybe there’s another way to look at business development. Instead of trying to get people to buy something they don’t really need or want, perhaps there’s a role for someone to match suppliers with customers (A broker?), with an emphasis on finding a good fit for a longer-term strategic relationship rather than a one-time transaction. That could be an interesting job, requiring technical expertise to properly assess the opportunity, a portfolio of potential solution providers, and a stake in ensuring a successful match.

Does anything like that already exist? It might be fun and actually serve a useful purpose.

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