What an opportunity to pull out your key customer contracts and unlock the hidden margin within that is rightfully yours. Routinely, contracts get signed, filed, and don’t see the light of day until it’s time to roll them over or deal with a major issue.
Worse still, most B2B suppliers routinely leak upwards of 15% of their net-margin customer entitlements per annum because staff are not cognisant of what has been agreed. This is money that is unknowingly lost under the guise of ‘maintaining a customer centric service focus’. In other words, we signed the deal, put the paperwork in the cabinet, and just kept doing what we have always done. No wonder the bottom line looks a mess!
So, pause for a moment and do the following calculation in your mind or on paper.
Take your biggest customer. Write down the annual revenue they deliver. Subtract the standardised ‘cost of goods or services sold’ and you have gross margin.
Now, deduct (pro-rata) everything else that gets bundled up and apportioned as overheads. This is your customer net-margin. Look at it carefully. How would you feel if it increased by at least 15% within 90 days?
If you are willing to make good on the three common margin mistakes routinely made by senior leaders, you will find out within the next three months:
- low contract compliance between supplier & customer;
- excessive service freebies given to customers; and
- gradual cost to serve ‘creep’ as customers demand more.
Each of these three items are within a supplier’s control – if they chose to manage them. Most don’t, so things get untidy. Don’t let this be you. Instead, try the following.
The Margin Flush
- Rank all your customers from highest to lowest by revenue.
- Dust off the contract of your largest customer.
- Insert the name of the staff person that should be responsible for each material clause.
- On a page, create three columns with these headings – More, Less, and Same.
- Review with staff and by material clause, ask the following question, “Do we do more, less, or same when it comes to this clause?”
- Categorise the answers in the relevant column and allocate a ‘value’ to each item of variance.
- Add up the variances & divide by your customer net-margin – expect it to be > than 15%.
- Give each staff person 14 days to fix their variance issues.
- Gather again in 14 days and mark off the gains.
- Repeat the process with your second largest customer.
And so on, and so on …
This process will be a game changer for business and culture. Expect, however, to hear plenty of the following:
– “I never knew we weren’t meant to do all that we do for free”,
– “Why have we always done it this way?”,
– “We get taken for granted”,
– “And all this time I thought that customers came first!”, and
– “The customer says they are happy to pay more but we have never asked them to”.
This process can be messy and uncomfortable. It will highlight area’s where business owners have been sloppy in protecting their own profitability. But don’t avoid it. A little pain can deliver plenty of gain and you probably need it more now than ever before.
Let me know how you go!
Example – Calculating Net Margin
– $6m COGS
= $4m Gross Margin
– $3m Overheads
= $1m Net Margin
+ 15% Contract Entitlement
= $1.15m OR an extra $150k of profit
Complimentary Margin Review
A 45-minute Zoom call, focused on a customer of your choice,
that pinpoints margin gain opportunities