NET MARGIN: THE TRUE MEASURE OF CUSTOMER PROFIT
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.”