Sales Bizdom from June/July FinListics Newsletter

Knowing the Value of How your Customers make Money

How do your solutions align with your clients’ goals? And how do these companies make money?

by Dr. Stephen G. Timme, FinListics Solutions

In today’s economic environment, it’s easy to assume a client’s primary goal is cutting costs. Yes, many companies have reduced costs and continue to do so. At the same time, however, more financially robust organizations are exploiting this recession to grow at the expense of less viable competitors. A CEO of a growth-focused company recently stated “We’d hate to waste a perfectly good crisis!”  Even companies currently focusing on slashing expenses are also planning for the future.

Now more than ever, sellers not only must know their client’s goals, but also how the company makes money—the relationships between revenues, operating expenses and assets both for current revenue levels and as revenue changes in the future. Leveraging this knowledge can help you sell more effectively and be viewed by your client as a value-adding partner instead of yet another transaction-focused vendor.

Here’s a case study underscoring the importance of having and applying this knowledge based on a real client. The client is a retailer whose current performance is like many other retailers. Revenue, profits and profitability have significantly dropped. Given this information and actions taken by many retailers, the tendency may be for a seller’s account strategy to focus on exploring with the client solutions that help reduce and better manage operating costs. Turns out at this time such a strategy would likely be of limited interest to the client.

Goals—several of the retailer’s publicly-stated average annual goals, which were easily found on the client’s website:

• 10% increase in revenue
• 15% increase in operating income

This client’s primary focus: growing revenues! (See the November 2008 issue for clues on finding a client’s goals.)

How they make money—What are the client’s plans for growing revenue 10% and operating income 15%? Operating income is revenue less all operating expenses. If the goal is to boost operating income at a faster rate than sales, doesn’t this imply the need to cut operating expenses? With that said, we can still explore our cost-focused solutions, right? Maybe. This is where understanding the relationship between a client’s revenue and operating expenses (Cost Structure) becomes crucial. (See the March/April 2009 issue for clues on researching a client’s cost structure.)

Operating expenses fall into three categories:

• Variable. These costs tend to change in the same proportion as units sold (like merchandise costs for a retailer).
• Fixed. Generally, these expenses don’t change with fluctuations in unit sale, at least for some range of revenue. Examples in retail include existing stores’ rental, utilities and maintenance expenses plus a large part of depreciation and amortization.
• Semi-Variable. Expenses like advertising and marketing, many administrative functions and, for a retailer, store labor costs typically encounter a lower percentage change than revenue.

Examining the retail client’s cost structure reveals sufficient fixed and semi-variable costs to achieve the 15% operating income growth without cutting costs. This strongly suggests the client would likely want to explore solutions that help achieve its goals for revenue growth. It doesn’t mean the client wouldn’t want to explore initiatives to reduce or better manage operating expenses.

But just like in our personal lives, we can only focus on so many activities at the same time. Good luck trying catch up on paperwork, clean the garage, build the fire-pit you’ve always wanted, take the kids to soccer, see a movie and, should I also mention, work on your advanced degree in a single weekend. Clients are the same. They, too, can only focus on a limited number of initiatives at one time.

So how do your solutions align with a client’s primary goals—and how does this client make money?

(this article is part of the FinListics Newsletter sent to all registered users of our products and services)