Profit Improvement 101; It’s Not Rocket Science

February 8, 2023

As the title would imply, making money isn’t always about top-line growth as much as it is about contribution margin and operating income.  I’ll not dispute the urgency for increased revenue, but I think there’s an excellent opportunity to improve profit margins through higher-quality revenue and managed expenses. This is not rocket science. However, I’m concerned about the knee-jerk reactions by leaders, as evidenced by hundreds of thousands of layoffs.

Executives use this time-worn technique as a financial engineering maneuver to satisfy the “street.”

These near-term tactics don’t get to the heart of the profit leakage that, if found, could help any company fine-tune operations, reduce costs, and improve operating income. This hunt for efficiency takes more subject matter expertise and cross-functional collaboration. This is why I urge executives to improve their business acumen across the population of emerging leaders who occupy the middle levels of the organization.

Here are a few things that can be undertaken to hunt for profit in any organization, particularly those that operate as complex B2B firms.

  1. Examine the composition of revenue and profit. Sometimes, the level of discounting and deal-making can result in poor revenue quality.  If the product suite offers a compelling value proposition that can be proven better than other solutions, those should be exploited. Stop selling to purchasing people and work with key influencers and decision-makers. Also, consider a greater focus on the customer’s business case: their justification to purchase your products and services. Perhaps you can influence them to consider their investment more carefully in your products – and by association, the relationship that is cultivated to earn their confidence.
  2. Fine-tune segmentation models.  Many firms segment their customers based on demographics, usage, or other preferences.  While effective for product planning and market development, leaders may wish to examine customer profitability within each segment.  Examine what’s purchased, at what frequency, and at which price.  The main idea is to pursue more profitable customers and stop cutting deals with customers who aren’t profitable. Give those to your competitors and let them suffer with sub-par margins.
  3. Probe for process improvements. As evidenced by the myriad process improvement techniques, how people do what they do should always be a topic for consideration.   In manufacturing companies, a Gemba walk can expose efficiency and cost management opportunities on the factory floor.  Yet, every function from order processing, product development, service delivery, and other administration functions should be put under the microscope. The main idea of any business process is to examine any process’s inputs, activities, and outputs. Inputs from one process element to another comprised the activities, steps, tasks, documents, or other items produced by one function and handed off to another. In other words, the output of one process step becomes the input of another. The complexity is that usually, no one has a holistic view of the interconnectedness of all process elements; the big picture is elusive, and it’s hard to connect the dots. If any executive were to oversee a business process automation project, they would need to examine all the steps in excruciating detail because the idea would be to reduce steps, save time, optimize hand-offs, and do what’s necessary to deliver internal efficiencies and cost savings. The other beneficiary is the customer because your company’s value proposition will be clear.  And better value can help you improve your pricing power and your company’s bottom-line performance.

These three suggestions barely scratch the surface of the detailed analysis needed to bring any of these to life.  Yet, these areas are considered more deeply; it may catalyze some of your company’s transformational efforts. This is also why building business acumen excellence into any company’s leadership and talent development protocols is essential.