Here is a client scaling journey I would like to share with you.
I met this business owner a year after the Global Financial Crisis The business was very well run operationally, but had suffered its largest ever revenue fall, with a 40% reduction in revenues. After 30 years of support from one of the 4 major banks, the bank’s response to the financial crisis was to threaten to withdraw all funding for the business. This resulted in the business owner moving to another more supportive bank. I became an advisor for this business at this stage.
8 years on, this business has not only brought its revenues back up to pre-GFC levels, but also it has also weathered additional competitive pressures, reduced its staff levels by one third, maintained its excellent staff culture, and made record profits for 6 of the last 8 years.
How has it achieved this?
• by improving gross margin
• firstly by improving its gross margin, and at the same time maintaining and gradually improving its client service levels, even though they were already excellent.
• by analysing and deciding which clients were worth retaining
• by asking, will it make the boat go faster? LEAN in action
• by rejigging its salesforce efforts and improving effectiveness
• by creating a digital marketing strategy, and starting to execute it
• by challenging and rediscovering the true key competencies of the business
Addressing each of these in turns:
By Improving Gross Margin
Analysis was the key. gross margin was analysed by customer group, and then customer. Then gross margin was analysed by product group, and then by product. This needed a pivot table hooked into the operational systems of the business.
Once this was created, I sat down each month with the Head of Sales in the business, and using his product and customer knowledge, and my analytical skills, we gained more and more insights into client behaviour, and in particular where clients perceived value. Then the key point: by reviewing the costing per product group and (where needed) product, either the costs within a product were reduced, the product was reconfigured, or the price was aligned to client value perception. Sometimes the product price increased, sometimes not.
As a result of this, the total gross margin of the business increased. In the first year of doing this, by 5%, from 35% to 40%. On a (then) $6 million revenue business, this improved profit by $300,000. After 28% tax, this meant that tax paid earnings increased by $216,000.
By Analysing and Deciding Which Clients Were Worth Retaining
Next, we determined which clients were worth retaining, and which were either wasting time and effort, or where not profitable. An A-D client analysis was undertaken.
A clients – advocates for the business, and providers of referrals. Good volumes, good margin, pay on time. Understood my client’s value, and found my client’s value was integral to their value to their clients.
B clients – displayed at least 75% of the traits of A clients.
C clients – either new clients who were yet to become clear as to category, or clients who had been largely ignored by my client, or who had changed their business to the point that my client’s products were no longer relevant to them.
D clients – saw little value in my client’s products, always drove down price, were slow and difficult payers, and always demanded ever more services and value, without being willing to pay. Once these clients were identified, and gradually ignored (New Zealand businesses tend to avoid confrontation), the resources that had been directed to these clients were directed to A and B clients. The result was 3 times the D client revenue and gross margin, with increased efficiency from the sales team, which further increased their revenues. Gradual elimination and redeployment of the sales team into A and B clients generated another $200,000 in profit and cashflow in the first 12 months of this exercise. Thereafter, clients were continually assessed as to which of the categories (A to D) they belonged to.
By Asking, Will It Make the Boat Go Faster? LEAN in Action
Using the “5S” Lean Principles, common sense was driven, and a factory and office environment that was already neat, tidy and simple got better with less effort required.
By Rejigging its Salesforce Efforts and Improving Effectiveness
Once the A to D customer analysis was complete, the sales team members were reassigned, and were called “BDMs - Business Development Managers.” The focus became value to clients, first and foremost, with service and gross margin constantly being adjusted to better satisfy the needs of clients. The joke in the business became “don’t be a Brochure Distribution Manager, become a Business Development Manager.”
By Creating a Digital Marketing Strategy, and Starting to Execute it
The Business developed a “digital marketing strategy and strategic plan.” Execution of this plan meant investing in a properly tuned website, quality content for the website, and digital communications with clients and prospects in New Zealand and offshore. This investment was repaid in 6 months, and revenue and gross margin from a standing start is currently 5% of total business revenue / gross margin. The target is to double this 5% share per year, for the next 5 years. This target is on track.
By Challenging and Rediscovering the True Key Competencies of the Business.
The business did some in depth soul searching. It emerged that they were best at tailored solutions to client’s complex problems. They started focussing on this, and increased total revenues and gross margin by another 5% per year. This is their ongoing target.
As can be seen from the results this client achieve, scaling works if a step by step approach is taken.