Do You Measure Your Customer Net Margin?

What do B2B suppliers use as their key performance measurements? Beyond year-end financial reporting obligations, if you were asked to nominate the essential one or two metrics that best articulate business performance, what would you select?

There would be many and varied answers to these questions, but I offer that systematic and ongoing measurement of customer net margin must find its way into every supplier’s monthly reporting pack. It’s the metric that regularly fails to make it onto the scoreboard, and this needs to change.

If You Can’t Measure It, You Can’t Manage It

Gross margin is more commonly used when measuring individual customer profitability, as it uses the already measured costs of goods sold (COGS) to the customer.

Net margin is more complex. It’s not a linear or automated calculation that can be readily extracted from an Enterprise Resource Planning (ERP) system like SAP. It requires individual business functions to record and apportion costs and time directly to identified customers.

Traditionally, such measurements are reported on an overall functional basis. Measuring and reporting net margin by customer requires effort.

Traditionally, finance reports company net margin and overall profitability while sales talk a lot about customer revenue and volume, and operations share information on total yield and unit costs. All the other functions in your business report on their unified targets. Cross-functional supplier KPIs are rarely tied to the well-being and commercial health of its individual customers.

The effect of this is that the real “score” of a customer’s worth to a supplier gets obscured behind a cloud of consolidated numbers. The discretionary resources applied to servicing specific customers do not get recorded and, as a result, are not managed.

This is the prime reason why the supplier’s net margin succumbs to “silent erosion.”

You can ignore it on the basis that your consolidated performance is doing just fine. Many do, but ultimately a supplier’s business depends on the individual performance of many customers, particularly the large ones.

If the customer base changes, so will the consolidated numbers. It’s preferable to know how they’re likely to change before they do.

Few businesses measure customer net margin. Do you?