Take Back Your Margin (Lesson 1)
If you are a business-to-business supplier who is committed to honouring contractual relationships with your clients, you are probably being asked to continually do more for less.
The lifeblood of your business depends on the current contracts of your long-term customers. Those contracts that you won over time, in most cases, are something to be proud of. You agreed to supply goods or services to your customers and, in turn, your customers committed to pay you as per your defined trading terms.
For all intents and purposes, that should be the end of the story about the commercial exchange between you and your clients. But the truth is, it isn’t, and you’ve probably known this instinctively for some time.
What if I could confirm for you that there are hidden pitfalls lurking inside the current contractual relationships with your customers that are silently, yet significantly, eroding your margins?
What would it mean for your bottom line to reclaim 10 to 20 percent of profit that is rightfully yours, but has somehow become lost under the guise of you being “customer centric?”
The Hard Reality—Profit Opportunities That Lie Ahead
Perhaps that inner voice that says your business is being pushed for more than you originally intended—far outside the terms of your contractual agreements, is becoming too loud to ignore.
The procurement warriors who reside deep within your largest customers are making their demands known, in pursuit of 3-5% annual “cost down” targets, at your expense. This is putting your entire operation, your staff and your supplier-customer relationships under increasing pressure.
And what if you’re unintentionally relinquishing margin because your staff are unknowingly—but with good intent—over-servicing customers?
Often customers ask for more, and your staff will give it to them—again and again. Their generosity can end up engendering a “keep squeezing them” mentality from your customers.
Unless your own staff have seen a customer contract as it applies to their specific job function, they’ll inevitably do whatever it takes to keep your customers happy. They have good intentions and are forthcoming with their time and energy.
Going beyond the “call of duty” to delight your customers is absolutely something to aspire to. …but not if it’s going to impact on the net margin you negotiated to achieve in your original contract terms.
If you don’t establish boundaries as the supplier about how your customers should treat and expect to work with you, then your “cost to serve” will grow exponentially over time, at the direct expense of your profit.
The Definition Of Margin
So, let me now be clear about the type of margin I am inviting suppliers to “take back.”
I am not referring to gross margin—the anticipated difference between revenue and cost of goods sold (COGS). Too much directly attributable customer cost remains excluded from such a calculation.
And I’m not addressing profit margin, which includes taxes and interest charges in its total deductions of all costs from revenue. I have no desire to delve into the specifics of corporate taxation, nor attempt to explain how borrowings affect a company’s beta.
Whilst both gross margin and profit margin play a distinct role in any business margin outcome, my focus is very deliberately on net margin.
Only net margin, when calculated for individual customers, can account for everything that requires time or money to provide specific goods or services to the purchaser. This expense, when deducted from customer revenue, results in a truly transparent picture of customer-specific profitability.
This is the margin that suppliers are most at risk of losing and this is the margin I invite suppliers to defend and grow. Over the next several articles, I will reveal 10 pitfalls that you, as a supplier, must overcome to protect your net margin and stop margin erosion.