How to Measure Success

While VP of Sales, I oversaw a hospital account that was among our leading 10 customers. Their purchases topped the charts. Yet our CFO questioned the account’s profitability when their contract came up every 5 years. Due to the competitive pressures in healthcare, the pricing of the products was not increasing from contract to contract. The volume was tremendous and the product mix carried some of the best gross margins. The question kept coming up about the account’s net profit. How do you measure your high-value customers in today’s diverse marketplace?

Determining Profitability

In the seminal book, “Choose Your Customer”, Jonathan Byrnes and John Wass state: “determining the true profitability of our customers is one of the biggest problems for companies today.” They described the shift from the Age of Mass Markets, where managers had a clear responsibility to look after their unique department, to the Age of Diverse Markets in which managers are responsible for net profit contribution. With today’s robust digital ERP capabilities a company can perform transaction-based profit metrics and analytics across multiple fields.

Byrnes and Wass explain, “Instead of assuming that revenue maximization is the objective of the account management process, leading managers now understand that directly maximizing all-in customer net profitability is the right objective.”

The Net Profit Viewpoint

Additionally, In the Age of Diverse Markets, it is feasible to look at each transaction from a net profit viewpoint. This is accomplished by digitally collecting all cost aspects of each transaction. In the opening hospital illustration, there were exorbitant distribution costs involved in making deliveries to multiple locations. Furthermore, deliveries consumed a driver’s full day on multiple days each week.  Additional costs accrued by having to correct persistent administrative and billing issues unique to the account. All costs considered, the hospital account produced negative net profits. It was not a high-value account and was reclassified as a profit drain.

Sales Effectiveness

Lastly, with digitally evaluated transaction-based profit metrics and analytics, companies can move to the ultimate level of sales effectiveness. High-value customers should no longer be appraised on revenues, or gross margins, but on their net profit contribution.

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