True Customer Profitability
Understanding true customer profitability is very important. A business could have two very similar customers—who both purchase the same volume of the same products at the same prices—and yet one customer could generate significantly more profitability for the business. This is because one customer might be easier—and less costly—to do business with.

Most accounting systems generally show both customers as generating the same level of profitability. The costs of doing business with a customer, known as the Costs to Serve, are a very important and frequently under-rated factor in determining customer profitability. The decisions that result from this incomplete information can result in companies pursuing business that appears more profitable than it really is.

Knowing true customer profitability can help a business be more focused on the customers that are the best fit for the business—and in its sweet spot. Costs to Serve are a vital piece of the knowledge base in determining true customer profitability.

SOAR SWEET SPOT MANAGEMENT
SOAR Sweet Spot Management is an analytical tool that evaluates and scores a company’s customers to determine which customers fit within the company’s Sweet Spot.

The Sweet Spot analysis allows a business to evaluate its customers based on several important factors including: sales volume, customer profitability, gross margin, transaction size, growth potential and customer relationship and loyalty. This analysis results in a scoring system that identifies ideal customers.

Customer rankings are determined using actual company data (which is uploaded into the SOAR software) and, in some cases, estimates by employees who work with respective customers.

Costs to Serve
Costs to Serve, a form of activity based costing, are additional costs incurred in doing business with a customer—over and above the costs typically captured by the traditional accounting concept known as Cost of Sales. Cost of Sales usually includes a standardized estimate of raw materials, component parts, direct labor and operational overhead. In the vast majority of businesses, Cost of Sales is the primary driver of customer profitability. But, in most business, Cost of Sales does not take into account the following costs that frequently have a very real impact on true customer profitability :
 

SELLING
EXPENSES
ENGINEERING &
ESTIMATING
EXPENSES
OPERATIONAL
EXPENSES
FINANCIAL
EXPENSES
QUALITY &
WARRANTY

EXPENSES
TRANSACTION
SIZE COSTS
Costs incurred
securing, inputting
maintaining or
growing customer
business
Costs involved
in designing
estimating
and pricing for
customers
Costs incurred
producing or
delivering
product - that are
not included in
Cost of Sales
Financial costs
resulting from
investment in
assets and
collection
of accounts
receivable
Costs involved
in maintaining
customer
satisfaction
Relative costs
of transaction
size


HOW SOAR SWEET SPOT MANAGEMENT IS USED
Knowing which customers are in the Sweet Spot allows businesses to focus their attention on those customers. For the customers that are not in the Sweet Spot, a concerted effort should be devoted to exploring ways to improve the customer’s Sweet Spot ranking, using the SOAR remedial techniques. Most businesses that use these approaches find they can significantly improve the Sweet Spot rankings of most of their customers. The end result is a business with a lot more customers in the Sweet Spot, which will contribute significantly to improving business performance and profitability.

How SOAR Sweet spot management works

  • Customers are evaluated and ranked for profitability, Cost to Serve, and Sweet Spot
  • Can evaluate up to forty Cost to Serve factors for each customer
  • Rankings are done by managers and employees who work with the customers—using an interactive, proprietary,cloud-based software tool
  • Rankings can be done and evaluated by division, segment or product line
  • Different access permission levels and passwords can be granted to different managers and employees
  • Recommendations are provided on how to increase the focus and concentration on the Sweet Spot
  • Generates comprehensive report that reflects Sweet Spot rankings, 80/20 analysis, and recommendations

SOAR to Strategic Excellenceâ„¢
The Parkland Group, Inc.

2000 Auburn Drive

One Chagrin Highlands, Suite 200

Beachwood, OH  44122


 


877.762.7722
216.621.1985
216.621.1894 fax
info@parkland.com
©2012 The Parkland Group, Inc.