Imagine a company called myBEAUdi Apparel, a trendy clothing and accessories producer. Economic headwinds are getting stronger—and what's myBEAUdi Apparel going to do about it? Its executives decide to adopt various cost management measures over the next few months to enhance efficiency in the long run and to focus on their key market. However, they're unsure how to go about doing this.
One way would be to define individual steps of multi-dimensional profitability which would provide a wide view of profitability drivers across multiple dimensions like product, individual customers and channel. In a nutshell, it can answer the questions: sell what, to whom and how?
What to sell?
It is not uncommon for profitability analysis to show that only the top 20% of a company's products contribute 80% of the profit, so let's assume that the same holds true for our company, myBEAUdi Apparel, despite their extensive product range of jackets, shirts, sweatshirts, socks and accessories. And behold! It is indeed true: after a first analysis, it turns out that the company's socks are extremely well-performing in terms of both number of sales and profitability. Research determines that, in particular, white socks are the most profitable product of myBEAUdi Apparel. The CFO's first reaction is that this must be the result of the newly introduced men's sportswear marketing initiative. But only a customer profitability analysis will be able to verify this supposition.
Whom to sell to?
Customers are the pillar of any business, but the respective profit contributions of different customer types is highly uneven and must therefore be well understood. Thus, a customer profitability analysis is critical to myBEAUdi Apparel since it enables the management to evaluate their customers and take a strategic decision over which customer segments should be kept, pushed or ignored.
A first glimpse at the individual customer segments shows that, contradictory to the CFO's thought, sports enthusiasts are not the most profitable of myBEAUdi Apparel's customers: that title goes to retirees. Although wearing white socks and sandals is a fashion faux-pas, it seems that it is still quite popular among the older generation. Furthermore it's revealed that profitability increases especially during summer months, and the underlying data suggests that myBEAUdi Apparel's retired customers buy an average of 10 pairs of white socks per person per month.
How to sell?
Online shopping has become more and more popular these days and myBEAUdi Apparel has shifted some parts of its sales process to direct selling via its brand new online platform. The Head of Sales is very proud of the success of the new platform—but is it the most profitable way of transacting with these newly identified key customers?
Not quite. An analysis on channel profitability for this product and customer reveals that indirect selling through retailers is still the most profitable channel. Even though selling to retailers results in fewer deliveries, they are still important deliveries, as the older generation still values the interaction and guidance from retailers and is therefore ready to buy at a premium, instead of via the online platform.
I see these kinds of outcomes all the time in my work conducting profitability analyses—the results of which can sometimes be surprising. By using multiple dimensions of tests it's possible to isolate a sound selling strategy and to understand why it will work.
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