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DST Asks: Can Your Business Measure Return on Customer Investment?

Although most businesses have the means for measuring their Return On Investment, DST has coined the term Return on Customer Investment as a more accurate method of determining profitability of the customer base. Many firms believe that their largest customers, or the ones they have been supplying for the longest time, are the most profitable ones, but access to pertinent data can contradict those assumptions.

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MISSION VIEJO, CA — Sometimes the ironic twists experienced by other businesses can serve as crash course MBA lessons for the rest of us. In 2001, the business software and other intellectual property of former retailing giant Montgomery Ward went on the auction block, eight months after the retailer filed for Chapter 11 bankruptcy, closed its 252 stores and liquidated its physical assets. The sophisticated, custom designed intellectual property and software system went up for sale at about 15 percent of its original cost in a futile effort to partially pay off the company’s many debtors. At the time, a news article about the sale mentioned that because the value of enterprises is increasingly in their intellectual property, a rapidly emerging trend among shuttered companies is to try to salvage some worth by selling the software and the data it contains, even if it’s at a fraction of the cost it took to create it.

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Oh, if only the company’s management had actually USED the data it was now selling at pennies on the dollar to monitor the buying habits, segmented profitability and changing demographics of its customer base, it may have been able to save itself.

In the parts distribution world, a well known warehouse distributor did just that and avoided the terminal fate of Montgomery Ward. Even the company’s star outside salesmen were having trouble feeding their families as the “business as usual” attitude continued, despite steadily plummeting revenue and profits. Sometimes “just working harder” results in just banging your head that many more times against a brick wall. It was time to change tactics.

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Data mining the firm’s extensive computerized sales files saved the day and the WD. With the correct information in the hands of managers who could make strategic changes, it became obvious that those customers thought to be the best ones based upon previous performance, were in fact no longer good prospects. Salesmen who had formerly made their livings by calling on Class 8 truck fleets with 300-plus vehicles were getting (metaphorically) killed because those same customers now had new lifetime warranty deals directly with the manufacturers on their parts. Taking a step back and reviewing customer sales information data in the company’s data warehouse showed that the Class 5 & 6 truck customers with 10 to 30 trucks each were the new profit center. As a result, the marketing and sales plans for the company were completely revamped in time to save it from going under.

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Do you fully understand your customers and their reasons for buying or not buying from you and how profitable the business of each one is to your firm? Our poll respondents to last week’s question all used the majority of equation elements we included to run their operations. The ability of your business to think fast, react quickly and anticipate change can be severely handicapped by the lack of data needed to make decisions. Some of the most valuable data to have at your fingertips includes:

* Volume vs. Margin Although you may be responding to competitive pressures to increase sales to accommodate the demands of shareholders and/or managers in today’s marketplace, are you increasing sales at the expense of decreasing the bottom line through shrinking profitability? Does every new dollar you earn automatically translate to increased profit?

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* Gross Profit by Customer

* Do you know who your top ten gross profit customers are? And are you measuring that by sales or by profitability? For example, if data for Customer A shows sales of $100,000 annually at 10 percent margin and Customer B shows sales of $50,000 at 26 percent margin, which one deserves your attention? Are you cross-selling product groups that more profitable customers aren’t currently buying?

* Returns by Customer

* Studies have shown that the annual costs of returns in the automotive aftermarket run into the billions each year. Can you measure new returns, defective returns and core returns by customer? Can you now utilize that information to calculate your Return on Customer Investment by combining that with your reported sales and margin figures?

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* Marketing Cost by Customer

* Although you may invest heavily in marketing and sales, are you including those costs by customer segment into your calculations on return on customer investment? Do you have the data to measure costs associated with “hot shot” delivery or rebates to jobbers, as well as the costs of print and other media ads to prospective customers?

* Contractual Obligations by Customer

* Do you have to offer fixed pricing at reduced margin or rebates in order to continue to service national accounts? After the costs of shipping, handling and returns can you effectively measure whether or not you’re making any money with each customer and/or whether you should consider “firing a customer?”

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* Net Profit by Customer

Now data mine the critical elements of measuring the return on customer investment from a state-of-the-art object oriented relational database in order to determine a more accurate net profit by customer.

Your firm should not only have the ability to analyze Return on Customer Investment data from many different dimensions or angles, categorize it and summarize the relationships identified. Management should use that information to chart the future course and navigate through choppy competitive waters. Montgomery Ward missed that boat.

We’d love to hear your thoughts on the topics we post, suggestions for additional questions and anything you’d like to share. Send us an email at: [email protected] .

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“DST Asks” is written and sponsored by DST Inc. The opinions expressed in “DST Asks” articles appearing on aftermarketNews.com do not necessarily reflect the opinions of AMN or Babcox Publications.

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