Companies can have different definitions or views of profitability. Nevertheless, it is one of the most important metrics that a business should take care about.
Many companies measure their success on revenues and units sold, but these metrics are not always helping the management in making decisions in the correct way. Some other companies include profit among the critical metrics, but still they can’t make sense of the huge amount of disordered data that the controlling department of the company provides them with. At the end management often decides based on its feelings and hoping for the best.
In order to make decisions that improve profitability, successful companies adopt a systematic process that gives management the tools to make data driven decisions that significantly impact margins.
You can impact profitability on 2 sides: from the cost side and from the sales side.
A detailed analysis of cost is for sure one of the processes that can be implemented in order to improve profitability. Nevertheless, what successful companies have focused on the most is the capability of making fruitful decisions on the combination of products and clients they have in their portfolio today and in a few years from now.
The assumption behind this approach is that different clients see different value in the same product due to many reasons (buying criteria, product life cycle stage, final application, etc.). This difference represents a big opportunity in terms of price and, in turn, profit.
Process can leverage on this opportunity by helping management:
- Focusing on a small sets of reporting tools with company-specific key performance indicators (internal and external)
- Setting product/client/market priorities to focus on by understanding the profitability in the current situation (what are the combinations of products/clients that are more profitable, what are not and what are the causes) and making decisions on how to take action (cut costs, dismiss products, leave clients, price differently for specific combinations, etc.)
- Monitoring the impact of the different decisions on profitability
Process wants to give company management the possibility to decide in the best way by being aware of their different portfolio combinations performances. Having this visibility is something that can give a very different and impressive insight. Often companies discover that those clients, products or the combination of the two who they believed being their best ones, are actually more value destroyer than value creators.
Process can improve a company’s profitability by making management aware of those gaps between what they would think and what it is in reality, therefore making them able to choose in a thoughtful way ( it will be clear what are the good combinations of product and clients and what are the bad ones).
Management through process can improve responsiveness to unprofitable situations and increase the creation of profitable ones, all aimed at a better product/client mix.