Let profits flow from the channel to you

Today's business environment is complex and volatile, forcing companies to re-examine their decisions. They cut budgets and re-established priorities. Businesses must gather the necessary information to determine which customers are profitable, make business decisions based on this, and then learn to work more effectively with customers in order to significantly increase their profit levels.

In order to truly identify which customers are delivering ROI, you must first determine the ROI for your channel customers, including retailers, wholesalers, distributors, and industry customers. Do you really understand which customers are the most profitable? Can you guarantee that the information you have is detailed enough to determine all transaction costs, including hidden costs?

The answer is not as simple as you might think. You must scrutinize all contact with the customer to come up with a comprehensive, realistic impression so that targeted actions can be taken after the analysis is over. And the work should be a process, not just a one-time or recurring activity.

It is possible to start with obvious direct costs such as cost of goods sold and promotional expenses, but it is still necessary to use activity costing or process costing to determine things such as the cost of maintaining inventory, returns and The cost of processing the order. Job accounting or process accounting divides the business process into jobs and derives the cost of resources and materials that the manufacturer consumes in carrying out the job. In this way, you can get a more precise picture of the actual cost your business is paying for each customer.

A display case is a good example. In order to provide value-added services to retailers and get more support from retailers in terms of product display, some manufacturers are beginning to provide displayable boxes to key retailers. Subsequently, manufacturers began to provide display cases of special specifications - these display cases were stacked according to customer orders, and with special promotion signs.

Consider the results of this competitive trend. First, costs once borne by retailers are now borne by manufacturers. Second, display cases are now no longer a competitive advantage, but a standard cost of doing business and maintaining industry standards. As a result, there can be huge gaps in the "cost of service" for customers in a certain industry. In addition, businesses are unaware that new customer investments are taking place, creating hidden economic waste.

Examples of similar display cases often require the manufacturer to invest significant additional labor and materials (stacking, corrugated boxes, plastic packaging) in providing this service. This cost is usually incurred on "finished goods" and is therefore not included in product profit or loss or cost of goods sold. What's more, although many manufacturers provide almost 100% of the boxes to a single retailer "displayable", only 20% to 40% of the boxes are actually used by retailers for display throughout the year - the rest. Most are only treated as ordinary shelf goods. This "economic waste" can be controlled, and the saved resources can be reinvested to benefit both production and sales.

Benefit Analysis

Follow an effective strategy and perform a customer profitability analysis that allows you to outline what uses and outcomes are mutually beneficial (for manufacturers and channel customers) and can be measured and operability. Effective strategies allow manufacturers and customers to engage in a "reinvestment" dialogue, using customer profitability analysis to identify activities that are ineffective and inefficient for both parties and only add to costs, thereby identifying inefficient investments (returns, slow sales) Merchandise, Random Picking, Rush Orders, etc.) and reallocate resources to mutually beneficial activities such as customer marketing, brand/retailer value development.

This in-depth ABC analysis should be specific to the "business" data level, not just the "financial" data level. Only then can costs be linked to customer manufacturing, logistics, order management, dunning and collections, promotions and industry marketing, returns and slow-moving merchandise, and operating and administrative expenses.

Capital investment in sales offices and equipment to support a user in an industry is an example of such customer-specific operating expenses that should be considered as costs in the analysis.

Due to the lack of extensive application and lack of practical experience, the following problems usually occur when analyzing the profit rate of channel customers within the enterprise:

---Lack of comprehensive and real data on total cost and profit of channel customers

--- data is analysed intermittently, inconsistently and inaccurately due to manual processing and lack of integrity

--- applied only at a point in time or in isolation (a system should be developed and Automate it to allow continuous application and measurement)

--- Not supported by business people (without support from business people, the boss dare not make decisions based on analysis)

--- The process is too complicated (emphasis Should be placed on business applications and reporting, not financial applications and reporting)

--- Fake "28 principle" (does not reflect full productive investment and transaction costs with customers)

- --Not linked to strategy (following an effective strategy, doing customer profit margin analysis makes usage and results mutually beneficial, measurable, and highly actionable)

If a company can collect the right data, develop a system that consistently provides the information it needs to act quickly, help improve its bottom line, and always know what to expect when investing in customer relationships Customers are profitable, then it can maintain a strong relationship with those most valuable customers.

Customized customers

Since each channel customer has its own characteristics, it is necessary for enterprises to formulate a set of careful business plans for different customers. There must be a full "connection" with the customer, otherwise a beautiful technical solution will provide only marginal benefits or no commercial value at all. You must have your clients and their interests at heart, as well as your own. Increasing channel collaboration means giving value to customers who can help you increase your bottom line, rather than manipulating them for your own success.

Other elements to enhance channel collaboration include integrating internal technology solutions such as CRM (Customer Relationship Management), PRM (Partner Relationship Management) and Supply Chain Management. Such internal integration must be consistent with the external client's e-commerce system and the company's own e-commerce system.

There are ten principles for increasing channel collaboration:

Develop a clear strategy. To be successful, the channel partnership model should serve the customer as well as the market strategy.

Create win-win value. Develop a clear, compelling business plan for all members of the value network. Give tangible reasons why the collaboration adds business value to all parties.

Manage channel dependencies. Appropriately use channels for sales, and carefully control the degree of dependence on channels. Don't be arbitrary, but cooperate!

Strengthen coordination among members of the value network. Create opportunities by aligning with the needs of channel customers when creating demand, fulfilling orders, service and support.

Promote value segmentation. Customers are different. Understand the relative value and capabilities of customers in each channel and treat them appropriately.

It's important to remember that customer performance equals brand promise. Channel customers are directly linked to manufacturers and end users and thus represent the company's brand. Channel customer performance reflects brand promise.

Develop targeted interactions. Effective collaboration requires the recognition that different channels and different customers have unique needs and value propositions. Understand and take advantage of these differences.

Create a funnel scorecard. Evaluate the success of efforts to increase cooperation. Continuous improvement based on evaluation results. Link channel customer performance and rewards to channel customers to specific criteria.

Create a community. Collaborate online. Networking connections with channel customers, rather than one-to-many connections, increases value exponentially.

Align the entire organization. New processes, organizational structures and corporate cultures must be aligned and rolled out from top to bottom within the enterprise.

Case Study

The experience of a business that manufactures and sells premium branded food products is a good example of how to effectively manage channel customers. The company lost more than $1.1 million a year by supplying custom display cases to one client. And as mentioned above, channel customers use these showcases only 30% of the time of the year. In order to reduce this waste, after strengthening the collaboration between the sales department and the order management department, the company began to provide display cases only on demand.

The company loses at least $300,000 a year in bad debt write-offs because another customer is consistently failing to pay on time. The company changed its accounts receivable policy/procedure for this customer, thereby eliminating the default and receiving all accounts receivable on time.

These two examples of "cost leakage" will only come to light after a comprehensive customer margin analysis. Manufacturers should not use customer margin analysis as a defense, or as a stick to force channel customers to change or adopt certain behaviors and activities. Instead, customer profitability analysis should be a collaborative means by which to identify reinvestment opportunities and devote resources to activities that benefit both parties.

Not understanding the customer's profit rate, not analyzing the customer's profit rate, not knowing the customer's profit rate, not only is not good for the manufacturer, but also the channel customers are also affected. No matter who causes or bears a particular cost or inefficient activity, there will always be costs, and there will always be waste. And resources that could have been invested in mutually beneficial and valuable activities were missed by both parties.

For companies that are striving to improve channel sales performance and increase channel dependence, they must capture customer returns and strive to strengthen cooperation. They must make customer relationships more effective and benefit both producers and sellers.

Reproduced with permission from How to Find-and Take Advantage of-Your Profitable Customers by Marc Shingles in the July 2003 issue of Darwin Magazine. CXO Media Inc. registers the copyright. Translated by Gong Hao.

By Marc Shingles, Director of Client Channel Profitability at Cap Gemini Ernst & Young Consulting.