When you have a sneaking suspicion that some of your customers are just not profitable, it’s time to analyze your profit by customer.
Video: What is Cost to Serve
Applying Pareto’s Principle to Your Customer Base
The “80-20 Rule”, known as Pareto’s principle, applies to customer profitability. That means 20% of customers are likely providing 80% of your profits. In addition, 50% are likely moderately profitable, and the remaining 30% actually lose you money. The question is, which customers account for most of your profits? And which ones are wasting valuable time and resources for only modest returns?
The benefits of understanding your customer profitability is two-fold. First, you can gain valuable insight into costing that can help you with pricing conversations or lead to strategic business decisions being made. Second, you have more information to help you analysis processes by each customer or client thus ensuring your operation is LEAN.
Determining Customer Profitability and Cost to Serve
Determining your profit by customer starts with the simple equation of revenue minus costs. The revenue data is easy to see. The tricky part is determining the cost of the customer. Customer cost breaks down into: acquiring (marketing), serving, and retaining. For labor intensive operations, the biggest and most crucial measurement is serving, or “Cost to Serve”.
In establishing your Cost to Serve, labor is the most challenging component. Why? Because material costs are relatively stable. Electricity and overhead do not fluctuate. Labor, however, is highly variable from person to person and process to process.
Activity costing on labor becomes very challenging. Most systems generalize it, but to really get a true understanding of your labor costs, you need to measure every activity by every employee across every process. This results in massive amounts of data that needs to be sorted to make sense.
Easy Metrics breaks down your customer cost for each process, product, and service – giving you complete profitability picture for each customer. It starts with merging employee activity data with time and payroll data. From there, the Easy Metrics algorithm reveals your true Cost to Serve and providing you with insights into activity based labor costs.
We take complicated data and make it easy
The Easy Metrics tool set takes employee activity data from unrelated systems. You might have 3 or 4 or more systems capturing the activities of the employees. EM enables you to merge all that data together and get a complete picture on what your activity costs are.
We merge your activity data with time and cost. Then you know what your true costs per unit are. You get more profits and efficiencies by knowing what your costs are.
When your business was young, you had three products, all packaged the same way. Twenty years later, you are pricing and measuring your costs like you did 20 years ago. But now you have 100’s pack types, 100’s different types of customers calling you, and your employees do 100’s of different activities.
Data is constantly being created throughout your operation. If you are going to compete, you need to know every detail of your costs, but massive amounts of data is difficult to sort through. With millions of line items every month, a spreadsheet doesn’t cut it. Even with databases, it’s difficult to build an effective data systems yourself.
One way or another you are charging for the services of your employees. You need to know where you are making money and where you are losing money on labor. Otherwise, you are giving away profits.
Why Easy Metrics is Unique
With Easy Metrics you have the visibility to make the right choices. You’ll find your most profitable customers, and can focus on nurturing them. For unprofitable customers, either make the customer relationship more profitable by raising your prices, changing your process, or severing the relationship.Unprofitable customers can break your business. Profitable customers can make your business great.
Because we delve so deep into understanding your Cost to Serve, we give you the ability to look at your true cost for each process and customer. No other software system can do that. They generalize, we get into specifics.
Try Easy Metrics for total visibility into your activity cost accounting, and see for the first time exactly where your business is making and losing money on labor.