Using the Power of Data to Compete with The Big Boys
If there is one obvious effect in the world of finance brought about by the pandemic it is the unbelievable powers and growth given to the tech giants like Amazon.
There has been a drastic change in the business environment. Consumer behavior has shifted front traditional in-store shopping to online transactions, and it is predicted not to change anytime soon.
This change led many companies who were not able to make the transition online to go bankrupt. If anything, the pandemic only widened the deep chasm between monsters like Amazon against your mid-size business. But there is one thing you could do to close that gap even just a little bit. Make use of the data you have from the pandemic to determine your profit peaks and profit drains. After which, align your company organization around that profit core to create control over your target market which you have determined to be defensible. In this article are three steps to follow.
Step 1: Profile
First, you need to analyze your profitability. Look back at your sales transactions and instead of allocating costs on a blanket basis, assign the actual costs to each transaction. Then, identify your revenue makers. Break them down to your “profit peak” customers, “profit drain” customers and “profit desert” customers.
- “profit peak” customers are those who account for about 20% of your total customers who make up half of your revenues but produced over more than 130% of your profits. This means they cost the least.
- “profit drain” customers are about 30% of all your customers who account for a third of your revenues but cost a lot and inevitably drained more than 50% of your profits.
- “profit desert” customers are the remaining 50% of your customers that create about 20% of your sales but produced less than 10% of their profits
Step 2: Manage your scarce resources
Once you’ve identified your customers, assign your best resources accordingly. This requires a deep understanding of your profit core, that is, who is your “profit peak customers” and your profitable products or services. Then you pinpoint the profit-drain customers and drop them.
When confronting giants, it is next to impossible to go head-to-head against them. You need to find a target market that is defensible and not aimlessly squanders your resources in trying to win a market share that is totally dominated by these giants.
The important thing is to act swiftly and decisively so you won’t lose your grasp on your target market. Identify money makers and allot resources appropriately. Trying to cling to all your revenue and applying across-the-board cost-cutting is a misguided understanding of profit. One advantage you have over tech giants is the ability to say no and tailor-fit your clientele. You should learn the importance of rejecting clients that don’t match your target market.
It is of utmost importance to create focused growth, especially in today’s harsh and unforgiving financial environment.
Step 3: Develop a new metric to analyze profitability
The traditional way of analyzing profit shows you the average profitability but it does not show the profitability of specific clients, products, or services. You might have to shift to transaction-based profit metrics and analytics. It allows you to assign appropriate costs to each transaction, this will provide you with a profit and loss analysis of each order line.
This is important because it reveals the profit peak and drains that were hidden by the average metrics, enabling managers to better identify opportunities and risks.
The dawn of a new age for business
Customer behavior has changed a lot this past year and it has ushered in a new era for business. Once a mass-market model, it has transitioned to a diverse market where you can find a niche for every business; where customer service has evolved from a transaction-based relationship to one of trust.
In the mass-market model, businesses sold only a limited variety of products or services to as many people as to gain the most revenue at the least cost. Today, the internet has caused the market to fragment and produced customers with very specific needs. In response, the businesses evolved from selling to the customer as a collective body to selling to the customer as an individual person.
Now, even in marketing, it is disastrous to produce content, product or service without understanding your market. You no longer sell to a generic mass; you are now selling directly to the consumer.
Shift to a strategy that is high-service in order to stand out from the rest. Identify your profit core and assign resources as needed. Develop a new metric that focuses on transactional profit analysis.
A new era has arrived and being prepared will make or break you.