Consider the following sales snapshot for a given fiscal year, where the organization as a whole brought in an average of over $100,000 revenue per sales transaction and kept almost $50,000 per transaction in margin. From the perspective of the sales team, they take home a nice commission, the business reports a nice return to shareholders, and everyone goes home happy.
However, what happens when you dig beneath the surface? Is every transaction a good transaction, every product a good product, and every customer a good customer? Chances are, if you look at your sales on a transaction by transaction basis, you will see some clear winners as well as some less than desirable scenarios. Consider the following graphic drawn from the exact same data as the above, but showing transactions spanning $2k to $250k with margins between 20% and 60%. That is quite a range.
There are many questions that this brings up. Here are a few of the key things you may want to ask:
1) How much time and resources are we spending on the smaller transactions compared to the larger ones?
The Pareto Principle has taught us that roughly 80% of effects come from 20% of causes. Let’s consider this in the context of our sales data with the following two statements:
80% of revenue and margin come from only 20% of customers.
80% of revenue and margin come from only 20% of products.
This is a concept that is simple enough to prove or disprove for your organization. It is pretty easy to determine who are your biggest customers and products and who/what is in the long tail that represents the bottom 20% of your margin. This isn’t to say that the bottom 20% is not important; however, this may be a good place to start when considering how to move forward with your business. Ask yourself these questions:
- Is there anything your sales staff can do to move the “bottom” customers to the top?
- Are there any products where you can decrease cost or boost sales?
- Can you use automation to minimize the time you spend selling products that don’t add much to the bottom line?
Keep in mind that you will likely need additional information to answer these questions. We will discuss some of this additional information below.
Smaller transactions may look great for your gross margin, but by the time you factor in the overhead of sales and administrative costs, as well as time spent by your operations staff, you may be selling some of your product at break-even or at a loss.
2) Are the lower margin transactions known and intentional, or are they flying under the radar?
As we saw in our “Revenue vs Margin” chart, even high revenue transactions range from “GREAT!” down to “What’s going on?” In order to gain a better perspective on where you are seeing high margin vs. low, let’s consider the margin percentage relative to sales velocity (in this case, revenue dollars).
As you can see, the transactions represent four distinct scenarios:
- Low Velocity, Low Margin (lower left)
- Low Velocity, High Margin (upper left)
- High Velocity, Low Margin (lower right)
- High Velocity, High Margin (upper right)
Why are we wasting time on low velocity / low margin products and customers? Maybe there is something that can be done to increase both the margin and the velocity. However, maybe it is time to drop some of these products and/or fire customers that do not contribute to the bottom line.
Low margin / low velocity products and customers are not providing adequate return on your investment dollars. Use your data to find the best place to put your money.
3) What are we doing right with those high revenue / high margin transactions?
As we see in the green box in the quadrant chart above, there are some products and customers that represent both high velocity and high margin. Challenge your organization to determine what sets these apart so that this can be replicated.
If even a small portion of the lagging products and customers were dropped so that your organization can invest more deeply in high velocity / high margin transactions, then you may be able to see huge gains in your bottom line. This would lead to higher commissions for your sales staff as well.
It is worth noting that the data in this article is extremely oversimplified.
Clearly, we cannot just create a few charts and declare that we should drop x% of our products and fire y% of customers. Rather, we need to look department by department, branch by branch, customer segment by customer segment, etc. to seek out potential opportunities. Many organizations complete in the hundreds of thousands to millions of transactions in a given year. In order to make the best use of this data, you must employ the proper tools and skill sets. Visualization tools such as Tableau and QlikView, used in conjunction with a data warehouse, can help us to tie together separate charts and sources of information so that your organization can easily make a determination on where to continue to invest its resources.
For information on how your organization can utilize data analytics on its sales transaction data to reduce complexity and boost profits, please visit Clevity at http://www.clevity.com.