Net margin: How To Measure It And Protect It From Erosion
Originally Published: DIAA.ASN.AU, July 2019
In our last issue, supplier margin expert Paul Allen offered some tips on how you can take back your margin and protect your bottom line without hurting customer relationships. Here is more insight – about measuring, informing and holding customers to account.
The Toyota Motor Corporation manufactured cars in Australia from 1963 to 2017. Toyota’s lean manufacturing processes are well-known for their production efficiency benefits, but during a site visit to the South Australian facility I was particularly taken by Toyota’s communication efficiency. Daily, a single A3 page conveyed all the critical performance information that allowed all staff to know exactly how their part of the overall operation was performing.

Outside the manufacturing environment, there are a multitude of well-known examples where a refinement of key reporting measures has become the benchmark for performance – occupancy rates as the primary key indicator of hotel performance, gold medals won as the primary benchmark for allocating funds to the Olympic team, or cash flow as the primary assessment of the health and viability of a business.

Pitfall: Net margin not measured

What do business to business (B2B) suppliers use as their key performance measurement? 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?

The answers are many and varied, but I offer that systematic and ongoing measurement of customer net margin must find its way into every supplier’s monthly reporting pack.

Simply put, if you can’t measure it, you can’t manage it.

Net margin is more difficult to measure than gross margin, because the calculation is not linear nor can it be readily extracted from an enterprise resource planning system like SAP. It requires individual business functions to record and apportion costs and time directly to identified customers.

Traditionally, finance staff report on company net margin and overall profitability, sales staff talk about customer revenue and volume, and operations staff 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 individual customers.

The effect of this must be obvious. The real ‘score’ of a customer’s worth to a

In the very least, businesses should
accurately measure and report the net
margin for their three biggest customers.
Need a refresher on the definition of net margin or the pitfalls already covered in the last issue of this magazine? Simply scan the QR code to download the PDF of the article.

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.

Pitfall: Value propositions are not valued

A value proposition is generally considered to be the means by which a business explains to customers why they should buy their product or service. The statement should compel a customer to agree that one product or service will add more value or better solve a problem than alternative offerings. Companies often use multiple value propositions to target different customers across a range of segments.

Fast food restaurants place a big emphasis on value propositions. They offer a

B2B suppliers can gain much from
considering how fast food chains
provide choice and value – on their
terms, not their customers’
plethora of choices, each at a price that is clearly displayed and rarely challenged. Negotiation with serving staff either at the counter or drive-through is non-existent because, like the airlines, everything is fully automated.

Take McDonald’s, for example. If you are after a genuinely low-cost meal, you could cobble together your own meal combo from a limited range of ‘loose change’ items for as little as $6. If you are after a big feed, dial it up to a ‘meal deal’ and you can have the signature burger, fries and large fizzy drink all for under $12. If a more gourmet experience is desired, you can design your own tailored burger, chips and drink package for anything up to $23.

These are three very distinct value propositions and they simply illustrate the ‘good, better and best’ model. At the checkout, customers are nearly always offered an up-sell option, in an attempt to increase the per-customer average spend. The choice is always up to the customer, but the more the customer tailors the order, the more net margin they are contributing to the restaurant.

The B2B Challenge

B2B suppliers traditionally struggle to separate the value of what is and what isn’t included in their offer to their customers. In the process of negotiating, there are often many ‘menu’ variables put on the table.

How often does the customer-specific ‘menu’ gets accurately reflected in the contract? How often, subsequently, do the negotiated variables and the contract terms get clearly passed on to all who participate in the delivery of the overall service to the customer? Beyond those who sat at the negotiating table, who else knows whether a customer, no matter how large, has opted to purchase the bargainpriced supply offering?

Unlike the fast-food staff who ask, ‘Do you want fries with that?’ and charge the customer for any extras, supplier staff often aren’t even aware that their business is offering a selection of ‘good, better and best’ service packages. Cross-functional responsibilities are often blurred and interest in detail can be low.

Functional staff just tend to get on with the job at hand and do whatever it takes to

About the author

Paul Allen has more than 25 years of experience in helping organisations unlock value with their contracted business partners. As a senior sales manager, marketing and general manager, Paul has worked with companies including Lion, Simplot, Tabcorp, Australian Paper and O-I Glass. Paul offers businesses a free margin review consultation. To find out more, visit Paul’s website,

satisfy the customer, as they have always done. If they send out extra pallets or deliver a day early, they don’t say, “We did all this extra work, now please, customer, pay this surcharge.” They’re more likely to say to their peers and managers, “We’re just doing our job, aren’t we?”

The shift in thinking that needs to happen is that customers are given the choice of matching service levels with corresponding prices. Like airlines and fast food outlets, the right to change your preferences or tailor a single order should always be available, but it must come with a clearly understood surcharge. It’s good to give customers what they want, but on the supplier’s terms.

The value of respect

Suppliers accept changes from their large customers repeatedly and readily. They regularly go above and beyond what was contracted without charging for the additional value provided.

If a beverage customer calls from the factory floor and asks his counterpart at

What starts out as a one-time
generous offer to make a change
to an order can often turn into an
ongoing customer expectation.

Case study: The undervalued commodity

Some years ago, I was managing the Asia-Pacific supply of glass bottles to one of the world’s largest beverage producers.

An Australian-based supplier competing with local wholesalers who were importing cheap alternatives enjoyed a moment that would forever differentiate their value proposition perception.

The supplier had a large team that both supplied and serviced its customers. The service side came through its quality engineers, who would routinely visit customer operation sites to assist with line performance and general efficiency improvements.

With one particular customer, the same engineer had been visiting for over 15 years and had become a trusted partner of the customer site team – so much so that he assisted with the monthly collation of continuous improvement reports.

All this was unknown to the supplier’s commercial team, who were in the midst of a supply negotiation with the customer’s head office procurement team. During the process, the customer sought justification for the 10% price premium that our local supplier wanted to maintain over the import alternatives. The customer argued that both the local and overseas offerings were ‘commodities’ and therefore of the same value.

Fortuitously, the engineer heard of this customer’s challenge and was affronted by their commodity argument. He provided his commercial colleagues with evidence of the efficiency gains and value that he had been able to supply to the customers over the course of the past five years. This evidence was contained in the customer’s very own monthly reports and identified the value provided by the engineer would support a 15% price premium!

The procurement team was given the choice of maintaining the price premium and services of the engineer or a lower price and the removal of the engineer’s support.

Pleasingly, the said engineer continued to visit the customer.

The human cost of staff mistreatment
can be higher than the financial cost
and needs to be addressed.
your company to deliver their packaging a little early, maybe on Saturday night instead of early Monday morning, should the supplier just comply with the request? Their order is ready, and there’s room on the truck.

Your staff, unaware of the true value of the rescheduling to your customer, agrees to do it. But in reality, your customer was about to be fined a fortune by one of their retail outlets for being out-of-stock.

You, as the supplier, get nothing for going the extra yard. You also get nothing for disruption and additional cost to your business as a result of the work changes – for example, additional transportation cost by the contractor working on a premium rate while the truck is being loaded and unloaded and travelling with extra delivery.

This shines a light on one of the biggest costs from undervaluing your value proposition – the loss of self-respect. By not paying attention to what your value proposition is and being blindly customercentric, you allow others to treat you in a way that ultimately costs you.

Pitfall: Supplier staff are mistreated by customers

The subject of workplace mistreatment, or bullying, has well and truly found its way into mainstream consciousness over the past decade.

Quite recently, I personally witnessed these examples of workplace mistreatment:

  • A supplier’s customer service team, comprised of seven women who managed the inbound ordering for a large supplier, were subject to routine verbal abuse from a large customer over many years. The situation was only discovered when, due to an office refurbishment, I happened to spend a day working within earshot. On one occasion, I watched and listened as one of the women became visibly upset while talking to a customer on the phone for some 60 minutes. She became so upset that, once the call ended, her colleagues comforted her and encouraged her to go outside for a walk. This was the team’s routine approach for dealing with this customer’s unacceptable behaviour.
  • During a review, a logistics manager was asked how many ‘good’ days he averaged at work each month. He replied that most days were good, but that his wife would disagree and say he only had two or three good days per month. This was because he only made it home for dinner with the family a few nights a month. Most other nights he was at work until 8 pm, dealing with the same customer, who routinely made ongoing delivery changes late into the afternoon. When asked why he allowed this to happen, the logistics manager said he feared the customer would make a complaint against him if he did otherwise.

When the issues described above were uncovered, senior managers made swift changes to rectify the situation. In the first case, the supplier’s sales director raised the issue with the customer’s business owner, who investigated the matter diligently and was shocked to have confirmed his staff member’s behaviour. He then had the staff member personally apologise to the supplier’s entire customer service staff.

All businesses have a responsibility to
address mistreatment in the workplace,
even if it comes from outside the company.
In the second case, a similar top-to-top discussion was held with the customer.

It was revealed that the customer’s staff member making the late order changes had already received two performance warnings for related issues. After an investigation, a third and final warning was issued, and the matter was resolved permanently.

It is worrying to think that both situations only saw the light of day and the opportunity to be resolved through chance discovery. How many other examples of customer mistreatment are out there?

It is worth contemplating what your own staff may be putting up with and the possible effects on their engagement, enjoyment, productivity and, ultimately, their health.

All business leaders have a duty of care for their employees’ wellbeing. Putting it into action requires deliberate inquiry into the state of workplace relationships and the provision of a safe and secure environment in which to solicit and receive feedback at all levels of a business and across all customer touchpoints.