Creating the path to profitable growth
Companies need to find out which customers are profitable and where to find more
A metal fabricating company that knows its unique sales proposition, whom it serves, and their values knows the key to profitability. Everything flows from that knowledge.
It seems that most sales forces, demotivated and disengaged by the lack of success in the last two years, have hunkered down and completely forgotten that sales is an activity. To be successful, a salesperson has to be active.
Before the recession, most businesses could coast along and rely on their credit lines to make up for shortfalls in sales. “Good” customers could be subsidized, and customers who didn’t pay or went under could be ignored by using reserves or just borrowing more cash. Satisfying customers, no matter the cost of doing business with them, was the gold standard for a lot of businesses.
Those days are gone. Companies have had to learn to operate without credit and to cut expenses religiously.
So how does a company move forward after the financial crisis? It has four ways to grow:
- Retain profitable customers.
- Let unprofitable customers pay their way or leave.
- Attract new profitable customers.
- Increase purchase frequency and transaction size from good customers.
Why focus on the good customers? Selling something to a customer who does not pay or does not pay within a reasonable time frame makes no sense. In short, the company that allows its credit line to finance a customer’s operation is headed for disaster. That’s why a company needs to analyze every sale by customer, order item, or service it provides to determine if the transaction is profitable.
The emergence of transactional buying, where relationships do not matter and the salesperson has to win the customer’s business for each order, has made the chase for higher gross margins even more difficult. Trust and value do not exist in a transactional relationship, and providing value beyond what is ordered creates cost within an organization without providing guarantees to secure future orders.
Determining Value and the Profitable Customer’s Profile
To begin down that path of profitability, a company needs to determine first who its profitable customers are and why they are buying. The easiest way to find an answer to the latter question is to ask the customers.
To make it clear, with very rare exceptions, customers are not using the services of a metal fabricator because it operates a laser cutting machine or a press brake or because it has opened a new building. More than likely, customers choose to do business with fabricators because of their engineering capabilities, excellent knowledge of specific industry niches, specialized processes that solve difficult problems, and their ability to make business transactions easy.
Once a company has defined its unique sales proposition, it has to concentrate on those customers whose needs it addresses best and determine where it can find more customers with those similar ideal characteristics. The fabricator also needs to check if the channels it is using to attract customers is attracting ones with the right needs.
In the past meeting a customer’s need created enough trust that a fabricator could charge a higher price for its expertise. In this new economy, however, “value” has to be provided on an ongoing basis; otherwise, you open the door to a lower-priced competitor.
A sure way to retain customers is to measure this value on an ongoing basis, to share the results continuously with customers, and to work hard every day to increase it. One more word of caution: If a fabricator’s value proposition is older than six months, it might already be outdated and need to be re-examined.
With capacity plentiful and customers short on cash, a fabricator can find its offerings commoditized and find itself competing in the “lowest-price” game, usually a losing proposition. Sad to say, without proper training and a lot of coaching, most sales forces can sell based only on the lowest-cost scenario. Without knowing exactly the value it creates for the customer, a company has no way to differentiate its services and products and to ask for a higher sales price.
If a business is forced into the lowest-price game, it needs to know its costs and the cost drivers, such as overhead cost and quality rework, by customer group and product. Most people assume that overhead cost includes only operations.
A company competing on price needs to streamline its organization from order entry to the shipment; charge for the use of its expertise and time; and select the communication channel with the lowest overhead cost. More important than spreading overhead cost for sales, engineering, finance, and service equally across all products is to analyze them and charge accordingly.
If a company takes business for the lowest price, it cannot afford to give away all the value-added services it has provided for free in the past. To regrow its bottom line as a lowest-price provider and add value-added services to the customer, a company has to:
- Invoice for the engineering time to develop a part or troubleshoot a customer’s problems.
- Charge for implementing revisions.
- Charge for holding a product beyond the due date.
- Charge for frequent schedule changes.
- Add finance charges for stretching out payment due dates.
Not All Customers Are the Same
For the past several years, sales trainers have urged companies to look closely at their customers, classifying them by profit margin into categories (A, B, C) and by using Pareto principles. Pareto principles say that 80 percent of profit comes from 20 percent of customers who use only 20 percent of a company’s resources. The remaining 80 percent of customers use 80 percent of a company’s resources while creating only 20 percent of its profit. Also, only 20 percent of lost business is actually lost because of competitive pressure. Fully 80 percent is lost because of internal issues.
During the recession, more and more customers have been classified as C, or unprofitable. If a company finds itself living this new reality, it is a true sign that it has a problem with its cost structure. In most cases, the overhead is too high.
To make it clear, the overhead is defined as the employees that sit in the front office, sales, customer service, engineering, and finance departments and in depreciation expenses for new buildings and machines. In seven out of 10 cases, operations overhead is cut first, and as a result, areas such as manufacturing engineering departments are left without the needed resources to improve continuously.
The cost pressure will continue to increase. Customers firmly expect reduced cost.
Those companies that still have a solid base of customers paying the bills need to focus their value propositions on the 20 percent of customers generating 80 percent of the profit and let the ones who fall into the C category go. When researching how they will approach their top customers, companies need to check into the customer’s purchasing history and order development, the margins on orders associated with that customer, the trust and value proposition connected to the customer, and existing communication channels. Figure 1 provides recommended reactions depending on the customer’s purchasing actions.
Cutting customers loose is always a tough decision. However, C customers are a constant drain. They are aggressive, drain your resources, continually ask for discounts, want leeway in payment terms, or are delinquent in their payments. A company that finances a customer‘s business with its own line of credit while also losing money with every transaction is not conducting business wisely.
Profitable customers who are increasing their purchases should be the targets. Company management should research these customers carefully, define their characteristics, and set out aggressively to find more of them. Knowing exactly what value the company provides will help it put together a more coveted list of potential A customers. A specific sales pitch should attract new customers and shorten the sales cycle significantly.
Simultaneously everybody in an organization needs to know who the A customers are. They are the gems that fabricators need to satisfy and retain. If their purchases are flat or declining, fabricators should follow customers’ value streams and see if they can add other products and services to the offering mix. Ideally, the customers recognize the new products and services as items they need and consume, and they are able to enjoy streamlined purchasing because they can make more needed purchases from a single source.
Getting the New Customers
Referrals mean a lot when it comes to targeting a market. With Internet buying becoming the norm, it is no longer who you know but rather who knows you and if those people recommend you and promote your products and services.
Nobody has the time for sales pitches or lunch meetings. Information for Generation X and Y buyers needs to be readily available, preferably on the Internet, because they will pick up the phone to place an inquiry only with a company that has a Web site clearly stated and the value that the company can deliver.
For the younger generation, the search for fabricating services starts with a Web site. That’s why the Web site has to be a visual representation of the company’s value proposition to the target market. A marketing specialist can design a site that is optimized to draw potential target customers in.
Far too often Web sites are designed as a marketing piece to show off a firm’s manufacturing capabilities and its facility. Having a laser machine, a new building, or 3-D modeling capabilities does not create customer value. The Web site needs to tell a story of how the business created value for an A customer. The metal fabricators that can show existing customers describing their satisfaction are providing the most convincing pitches for their Web sites.
Ideally, if someone types a phrase into a search engine such as “laser welding of vessels” or whatever the specialty may be for a particular metal fabricator, that metal fabricator’s name will come up on the first page of the search results. Very few people look beyond the second page.
If a company does not appear on that first page of organic search results, its Web site is not ready. People may find that company through extended Web searching, but the Web user is not likely to engage because he doesn’t immediately understand how that company can help him.
That’s why the name of the game is to get the search engine ratings up. Social media can help with this task (see Figure 2).
More specifically, a metal fabricator can follow through on these efforts to make its Web site more attractive to search engines:
- Work on search engine optimization. A lot of guidance on this subject is readily available on the Internet, and it is time well spent researching it.
- Create a blog. A metal fabricator can use a blog to write about how different approaches led to success in fabricating certain products. The goal with blogging is to develop a readership and create a reputation as an expert in the targeted market.
- Include online press releases and online advertising on the Web site. This encourages other sites to link to the site, which boosts search engine ratings. The most powerful links to the Web site come from educational (.edu) sites. Search engines recognize them as the most credible sources.
When in doubt, a metal fabricator can consider pay per click, whereby the company pays the search engine provider to show an advertisement when a certain search phrase is used. This can lead to a lot of wasted money if the company is not capturing the right audience or has a weak landing page and Web site.
Social networking sites can help connect parties, but the lineup is changing every day. Sites are shooting up and losing their luster at the same speed. In addition, their membership makeup might change abruptly, affecting the target audience on which a company may have been keeping tabs.
The scary part about social media is that a company cannot control what people are saying about it. And what anyone posts stays out there indefinitely! Information will be posted and opinions will be voiced about a company whether or not it participates in social media. At minimum, a business should listen in on what is said about it and stay on top of it. Bad information is only damaging if a company is in denial; solving problems fast with integrity, on the other hand, enhances a company’s standing. Several services scan the Internet and provide daily updates for those companies without the time.
A great Web site that nobody finds is worthless. Hiring a professional that can design it and knows about search engine algorithms may be worth the money.
Once a fabricator determines what kind of value it can deliver and develops a profile for the kind of customer it wants to serve, it can foster more profitable relationships with its current customers and seek out others that offer the same potential.
The FABRICATOR is North America's leading magazine for the metal forming and fabricating industry. The magazine delivers the news, technical articles, and case histories that enable fabricators to do their jobs more efficiently. The FABRICATOR has served the industry since 1971.