We’ve entered a new era of business. In the past businesses sold a relatively narrow range of products to as many customers as possible to maximise sales and minimise costs.

If this is still your business model then it is likely that you’re going to fail; Amazon and the other digital giants are on a mission to steal your customers.

But all is not lost. Amazon and others have a very focused strategy – arm’s length service to small, price sensitive customers. This leaves a huge, wide open marketplace for your business to respond.

To do so means analysing data that you already have available to calculate the profit you make from each customer, product and distribution channel.

The problem is that traditional accounting systems cannot match every component of a sale with the actual cost of producing it. Standard metrics, like sales and costs, show the business’s average profitability, but not the profitability of individual segments of products and customers.

They can tell you whether your business is making money, but not where it is making money.

This requires a completely new way to analyse profitability beyond the averages of traditional profit and loss accounts, in what is called transaction-based profits analysis. Fortunately state-of-the-art apps and modern software allow the appropriate costs to be added to each transaction to create a P/L for each sale analysed, for example, by customer, product, store location, salesperson and delivery channel, to show the actual profitability of every segment.

The use of these data allows your business to identify your most profitable customers, products, stores and distribution channels to align your business around its profit core. Here’s what you need to do to implement this strategy.

1. Identify the customers and products that make up your profit core: this involves identifying the profitable customer segments to target and avoiding those that are vulnerable to Amazon and others. Traditional thinking has been to cling to every customer and sale and cut costs, but choosing all customers – which isn’t a strategy at all – won’t cut it in the current era.

2. Develop transaction-based metrics: analyse every transaction on a monthly basis to show the actual profitability of each product bought by each customer every time they make a purchase.

3. Concentrate resources on your profit core: by repositioning to dominate the defensible segments of your market you can concentrate your resources (such as marketing expenditure and the design of the customer experience) around your ideal customers by offering them special services (such as out-of-hours shopping), priority on new products and special offers, and focused online deals.

Identifying and developing a profit core strategy and saying ‘no’ to customers that don’t fit your target profile will be anathema to many businesses. The result, however, will be in lower operating costs (not having to service low profit customers), reduced working capital and increased profits from a more focused business…..and not trying to compete with Amazon.

To your success

Noel Guilford

PS If you would like to learn more about how to develop transaction-based metrics then click the button below to book a call with me.