NET MAR­GIN: THE TRUE MEA­SURE OF CUS­TOMER PROFIT

NZ Business - - CONTENTS - www.margin­part­ners.com.au

IF YOU’RE A B2B sup­plier com­mit­ted to hon­our­ing con­trac­tual re­la­tion­ships with your clients, you are prob­a­bly be­ing asked to con­tin­u­ally do more for less, says Paul Allen, di­rec­tor of Mar­gin Part­ners.

“What would it mean for your bot­tom line to re­claim 10 to 20 per­cent of profit that’s right­fully yours, but has some­how be­come lost un­der the guise of you be­ing ‘cus­tomer cen­tric’?

“Of­ten cus­tomers ask for more, and your staff will­ingly pro­vide it – again and again. Their gen­eros­ity can end up en­gen­der­ing a ‘keep squeez­ing them’ men­tal­ity from your cus­tomers.

“Un­less staff have seen a cus­tomer contract as it ap­plies to their spe­cific job func­tion, they’ll inevitably do what­ever it takes to keep cus­tomers happy. They have good in­ten­tions,” says Allen.

“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 mar­gin sup­pli­ers need to mea­sure and de­fend by in­di­vid­ual Cus­tomer, is known as net-mar­gin, op­er­at­ing mar­gin or EBITDA, ex­plains Allen.

“For­get 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.

“Profit mar­gin is too broad, be­cause it in­cludes taxes and in­ter­est charges in its to­tal de­duc­tions of all costs from rev­enue.

“Only net mar­gin, when cal­cu­lated for a spe­cific cus­tomer, 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 a cus­tomer’s prof­itabil­ity.

“This is the mar­gin that sup­pli­ers are most at risk of los­ing be­cause it rarely gets mea­sured!”

So, start with your sin­gle big­gest cus­tomer, Allen ad­vises. “Cal­cu­late the true ‘cost to serve’ and be­gin track­ing your net mar­gin. Com­pare the re­sult to your orig­i­nal contract ex­pec­ta­tions and then breathe. The jour­ney can be­gin.”

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