Customer Profitability Analysis and Pricing Optimization
Evergreen Consulting's top-down approach to CPA for distributors, SMART CPA, is a systematic and consistent methodology for allocating and assigning costs. The algorithms we use are based on cost behaviors and our experience working with distributors of all types and sizes. Our principles call for a customized approach for each project. We account for all significant variables (sales cost, freight, vending machines, customer inventory, cost of getting paid) for each customer. Different methods are used for each order type (warehouse, direct, will call, counter sale, service).
SMART CPA is uniquely integrated into SMART Pricing. Our holistic approach to margin optimization and customer profitability requires that we use CPA data to determine our pricing recommendations. Evergreen Consulting's philosophy is that customer profitability is a "three-legged stool" balancing margin, order size and cost to serve.
SMART CPA reporting is diagnostic of root causes of profitability for each customer family, segment, branch and sales territory. It is also therapeutic including specific recommended actions for each customer in each profit quadrant.
After undertaking pricing optimization and customer profitability projects for hundreds of distributor operations, our firm has a distinct perspective about the cause-and-effect relationship between customer profitability and pricing. Our viewpoint is unique because Evergreen is the lone consulting firm that performs both of these analyses for distributors.
There are several reasons why customer profitability data is required to achieve success with pricing optimization. For example:
- Many customers are low-profit or lose money for the distributor because of below-market pricing. In other instances the culprit is small order size, high cost to serve, or both. If pricing is already at market levels the correct therapy is not raising margins.
- A small number of customers generate a large proportion of total distributor profits. The root cause of their profit contribution is typically a combination of profit margin, order size and cost to serve. Fixing margin outliers for these customers isn't a priority if the improvement wouldn't "move the needle" and could jeopardize the distributor's relationship with a high-profit account.
- The "speed to revenue" temptation when implementing pricing recommendations may be hard to resist. Customer profitability insights make it clear which pricing outliers can be put into effect quickly and others better implemented over a period of time.
Now that "big data" analytics are becoming widely available to distributors, CPA is no longer an extravagance.