Tuesday, January 04, 2005

Long Tail with Contribution Management

A few more items today, as a new blogger getting my first responses is very meaningful. First a thanks to Hugh Hewitt (www.hughhewitt.com) who mentioned my blog, many thanks to be noted by someone of his stature. Second I appreciated the note I got from The Comp Expert at (www.thecompexpert.blogspot.com) who has now led me into a network of business type blogs. Third and not lastly is the long tail concept post that you will find attached to the Long Tail Concept post of yesterday.

I wanted to continue the comment about the Long Tail Concept noting one of the nuggets I drew from the original article and then added to:

●The biggest money is in the smallest sales. (if you contribution manage)

Contribution management is the key in every business to getting the outcomes that either you or the business is working toward. Contribution management is the ability to understand the profitability of each sales transaction or group of transactions that the business executes with its customers. Do you know the profitability of every customer?

For many companies knowing that profitability is a monumental effort. There are many roadblocks to keep the business from knowing. Knowing. Before long you will get to know another view of mine in business, so many businesses, leaders, managers, supervisors and the rest THINK they know what is going on, but do you know that you know? In contribution management you first have to know your order flow processes. Then you build your 'cost to serve'. Once you know your cost to serve for your standard products or services then you can begin to build customer profitability.

Studies have shown that as many as 35% of some company's customers are marginal or profit losing transactions. The most difficult thing to do is to convince the operations that they immediately need to raise prices and/or say adios to those customers. Let you competition have them and use your resources to focus on those that are very profitable and those that are somewhat profitable. Those in the second group you need to work with to improve the return on the work that is done. In today's marketplace, marginal utility is not what it used to be. In the days of lean manufacturing and years of cost reductions hanging on to those marginal and loss making customers is not worth the effort unless they can agree to price increases that at a minimum cover your cost to serve. The real problem is that many companies dont know as they have never fully worked through their cost to serve, even at the most basic level, let alone a fully loaded (all overheads allocated) ABC (activity based costing) for standard products or services.

So the long tail works, but know your cost to serve. Even in the internet world where the cost can be very small, know it so that you can know what progress you do make when you process customer transactions.


At 11:21 AM, Blogger Cary Duke - The Comp Expert said...

One of the goals we accomplished in 2004 was an alignment of our clients so we could KNOW which were profitable vs THINKING which ones were profitable. Some were obvious others were surprising. 2005 is the year we move them up or out.

In addition, we created an entire new profit center to enable us to have a "long tail", i.e., more products to sell that are service based and/or internet delivered.

Keep up the good work.


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