Concept:
We often calculate the gross and net profit by areas of responsibility, product group, sales territory or geographic area. But do we understand the ‘real’ profitability of individual accounts?
To do this we need to calculate not only the cost of Raw Materials, Labour, Distribution, etc. but also the ‘hidden’ costs, which may not be assigned to individual accounts. Firstly, these costs need to be identified which can be a revealing experience in itself.
Example:
Some examples of hidden costs are:
- Product modifications
- Specification changes
- Stockholding cost
- Origination/set-up cost
- Travel costs
- Personnel support
- Account management costs
- Administration/ordering costs
- Marketing costs
- Training/support required
- Late payment versus terms
- Inefficient staff
- Continual customer complaints
Once we clearly understand the full cost of doing business we can calculate individual target account margins and set a realistic pricing strategy.
Compare two of your accounts at both ends of the spectrum to understand how the ‘cost of doing business’ can affect profitability. What action can you take to reduce these ‘hidden costs’?