Numerical Insights - Show Me the Money!

When most business owners think about profitability, they think about accounting sheets that show “revenue minus cost.” That’s all well and good, but that’s only a macro view of your business. It’s time to dig in and truly know where your money comes from. Are all of your products profitable? Do all of your customers contribute to your bottom line? These are the types of details a business should get into to truly know where the money is and whether you're truly maximizing your bottom line.

I was once handed a large database of information containing a log of customers and sales of products to customers. I was asked to “see what I could find out from the data.” As a reality check, all projects like this begin the same way; you must clean the data. This can take several hours. I mention this only because it’s a portion of time that many people fail to consider. Now, on to the fun stuff!

Skipping the details of Excel manipulation and pivot tables etc., the general idea is to look at the data in several different ways to see if it tells a story about the business. In this case, the data was examined in relation to the different products offered by the company and the different customers of that company. This newsletter will cover the customer analysis and my next newsletter will cover the product analysis.

Note: since the graphs are rather detailed, click here to see them in PDF format while you read the newsletter.

ABC Customer Analysis

This particular company has upward of 1500 customers (the names of which have been jumbled to protect their privacy for this newsletter but you’ll learn the concepts just the same). The contribution to the company’s profit has been summarized in a graph showing the best customers first. (See graph 1). As you can see, most of the company’s profit is coming from a small portion of their customer base, yet the company was providing the same level of “account management” service to all customers. Based on this result, the company opted to provide three levels of account support (grouped as A, B and C in the graph) and even outsourced the service to group C.

In graph 2, we look at the same data another way and can see that 74% of customers contribute a small profit and there are several customers actually producing a loss and eating into the company’s overall profit. Zooming in on the “A” customers (graph 3), we see that the top 10 customers actually account for 47% of the total profit and the top 20 account for 64%. Taking a better look at the “B” customers (graph 4), we see that this large chunk of customers only contributes about 9% to the total profit. Don’t even get me started on the “C” customers!

I’ll conclude this newsletter with a graph of the 50 most unprofitable customers. The 10 worst make up 80% of the total profit loss. Now, those customers definitely need to be reconsidered!

You can also look at your products using the same type of ABC analysis. In my next newsletter, I’ll do exactly that, so stay tuned.

I hope this edition of the Numerical Insights newsletter has provided a bit more information to assist you in your quest for data-driven decisions. As always, I welcome input from my readers and if you found this newsletter of use for a friend, you can use the "Forward to a friend" link on the right-hand side.

And as one final note, in case you've recently joined my mailing list, links to some recent issues can always be found here.

Until next time,
                          Tracey Smith
                          www.NumericalInsights.com
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