3 Steps to Analyze Profit Margins
Many of us in sales spend countless hours with our playbooks to close out a winning year. Unfortunately, the year-end rush sometimes comes at a greater cost than we realize; in most cases the close-out “deals” we structure erode our margins faster than we realize. Particularly, discount-driven approaches such as volume bonuses, cash discounts, and some of the other off-invoice allowances make margin leaks especially opaque. We compiled some of the key considerations to take into account to identify additional year-end strategies.
How to Identify Margin Leaks? Start by Charting the Distribution of Your Prices
By identifying and managing all elements of your pricing structure, you can find and realize additional opportunities to increase your net margins. A good place to start is to chart your pricing window using the following axes:
X-axis: Annual account volume in $$
Y-axis: Net price as % of the standard price
To explain some of the opportunities you have in evaluating your pricing structure, we shared the example above. As you can see from the chart, the net price points as per cent of the standard listing price vary widely as total annual account value increases rather than showing a more linear decline, as one would expect. The green zone in the chart represents the expected distribution however, in reality, there are many price points that fall above and below the expected range. This wide variation could indeed be for mostly strategic or tactical reasons but as we all know, sometimes this type of distribution ensues for no viable reasons at all.
Next, Look at the Distribution of Your Margins
The distribution of your net pricing against the total account value can help tell a really good story, however the distribution of your net margins may tell a quite different story. Therefore, before you finalize your account-specific strategy such as whether or not pursuing a specific lead or changing its deal structure, consider conducting another layer of analysis on the net margins vs. various costs of your existing accounts. Some additional costs to consider include
cost to acquire
cost to deliver
cost to serve
cost to retain
cost to retool etc.
Now, layer your profit margin as percent of your standard price on top of the first chart.
Finally, Identify Your High Profit Margin Sub-Segments
The third part of the analysis is more qualitative than it is quantitative. Begin by comparing the differences between the trends on each chart. Most likely, some patterns will begin to emerge to represent your highest and lowest profitability segments. Once you have an idea of which accounts to do a deep dive on, start listing the attributes and types of costs associated with those accounts. Finally, go back to your play book and construct a heat map of similar accounts to pursue. This brief exercise will save you much time and effort during the few weeks we have left in the year.
To summarize, here are the steps we have covered for this profitability analysis:
Understand the distribution of the net prices vs. total account value across all your accounts
Identify all the different types of costs beyond invoiced discounts and standard product costs
Compare the distribution of the net price and the net margin of your accounts and identify the account attributes for pricing, servicing, managing, or retaining that result in the highest profit accounts
Identify the most profitable sub-segments and create a heat map of your leads that are similar to these accounts
Prioritize and pursue only those leads until the end of the year
An effective pricing structure tracks and accounts for not only the invoiced discounts but also for all the various types of losses. This may be easier said than done, especially for more complex deals, however many enterprise software solutions today provide efficient ways of tracking even the minute details of an account structure. It’s worth keeping in mind that incorrectly priced deals mean long-term lost profits.
Ready to begin your own pricing innovation?