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Business Operations Performance Metrics: Gross Margin – Five Steps to Improve your Margin

Business Operations Performance Metrics: Gross Margin – Five Steps to Improve your Margin

~~The success combination in business is: Do what you do better and do more of what you do. David Joseph Schwartz ~~

Margin improvement – this phrase usually conjures up images of budget cuts and lay-offs – and strikes fear in the hearts of the toughest managers.   But it really does not have to involve any of these things – costs reductions though important should not be used as the only lever in any margin improvement strategy as you soon run out of cost reduction options.    Gross Margin (as I wrote in my earlier post on key performance metrics) is the mother of all metrics and the quickest way to determine if your business in on track or not   and acts as an early warning system to put in place margin improvement initiatives. So, a quick definition of gross margin:

Gross Margin (%) = (Net Sales – Cost Of Goods Sold)/Net Sales

The gross margin represents the   percent of sales that the company keeps after incurring the direct costs associated with producing the goods and services sold by a company. The levels of gross margin may vary dramatically based on the nature of business (products or services, manufacturing or retail, etc.) but the principles and strategies behind improving margins boils down to two things – increasing your sales and increasing your operational efficiency to   bring down the cost of goods sold.

Thinking through some such initiatives that I have been involved in and noting what worked and what didn’t, these are the five steps that I came up with that I believe are critical to the success of any margin improvement initiative:

Margin Improvement Step #1: Customer profiling or Knowing your best customers – It all starts with the right data that gives you the information that you need, in this case a profile of your customers (or customer segments) that gives you a view of where your profits are coming from. Pareto’s principle applies here too; around 80% of your profits would come from 20% of your customers (or segments). Now you have identified where to focus your energies on – sell more in high profits areas and less in the low profit ones. This will also help in reducing the cost of sales that arise from keeping alive or going after customers where you are consistently not making any margins.

Margin Improvement Step #2: Order to Cash process or Leaving no money on the table – Take a close look at all your internal business processes and systems that are in place to book orders, bill them and collect the cash. Where are the revenue leakages – do you have a method to track unbilled and deferred revenues and plug these?  Are invoices being raised in time or are customers being essentially financed by you? Do you have policies to regulate and control warranties, refunds, credit notes, etc.? Little things add up to a big dent into your margins over a period of time.

Margin Improvement Step #3: Pricing Policies or Enabling your Sales force Effectiveness – The quickest way to increase the gross margin is to increase prices. Even a 2-3% increase in prices brings in a big jump in margins and the people who can do this are the sales team. So are the sales people in the company aware about the linkages in pricing and margins? Is there clear communication and transparencies in how pricing is done within the organization and how it translates into bottom line for the company? Are there tools that can help sales make better decisions by giving them access to real-time data on profitability?   Making key stakeholders aware of the tools at their disposal and how their actions impact the outcomes is a big step forward in any improvement initiative.

Margin Improvement Step #4: Operational Excellence or Reducing inefficiencies – This is all about doing more with less and driving performance improvement through the smart use of metrics. Look at all areas of waste and inefficiencies  – space that is not being used, people that are not being utilized, advertising that is not working, projects that are out of control, inventory that is gathering dust, supply chain expenses, travel costs, etc. Translate this into a plan with measurable outcomes and deadlines and assign clear ownerships.

Margin Improvement Step #5: Rewards and Celebrations Or Creating a Customer-focused Culture – Tie the incentives, awards and rewards that you give to your employees clearly with the margin goals. Tie Sales bonuses with the levels of margin that each sale brings in and not just the revenue. Celebrate early wins to reinforce the importance of the margin improvement initiative. Positive reinforcement works best here.   Research shows that companies with a customer-focused culture that consistently deliver value beyond customer expectations grow at rates that exceed industry averages. Customer Focus is a profit strategy and the way to achieve long term profitability is to build and sustain the culture of customer focus within the organization

What steps have I missed ? What business operation metric do you use to measure margins?   What has worked for you in improving margins? I would love to learn from you.

Five Lessons in Customer Management from Hospital Operations

Five Lessons in Customer Management from Hospital Operations

I have spent the last week living in one of the best hospitals in the country and there has been a lot to observe, watch and learn, especially in the area of customer experience management. Life and death scenarios, ambulance sirens, dazed patient attendants and teary eyes are not exactly conducive to a brain functioning well enough to pick up the nuances of management; but I was alternately awed and disappointed enough with the experience to take away a few lessons that are applicable in all service-oriented businesses.

Lesson #1: Empathize – It is easy to get into the “it’s just another customer” attitude but keep in mind that the customer is a unique individual with his or her own hopes and fears. You have to treat every single customer with compassion and respect. You could be a super surgeon but unless you empathize enough with your patient and get into her shoes, you will never be informed enough or trusted enough to succeed in your job. A simple pat on the shoulder indicating that you understand and are there for the patient often times works better than a hundred words of technical jargon.

Lesson #2: Be the Cog in the Wheel – Sometimes, you just need to follow the rules and do the best you can in your own sphere of influence without knowing or worrying about the big picture. The moment and the deed are enough and just what the customer needs at that time. An attentive nurse, a caring cleaner and a cheerful security guard – they are not tasked with saving lives – but their roles and competencies in the tasks assigned to them make a huge impact on the whole patient experience. And of course, the management also has a responsibility to treat their people well so that they in turn are motivated to treat customers well.

Lesson #3: You are the Expert – The customer is not always right. And you, as the expert that the customer has come to for a solution, have a duty to be assertive and convince the customer about the solution that you believe is the best for the customer. A patient may choose for the least painful and quickest route for a cure but a doctor is the best person to advise the patient on the right solution which may not be the easiest for the patient to go through.

Lesson #4: Grace under Fire – In high pressure situations, it is so important to keep your mind clear and your temper even to ensure that you take the right decisions to serve your customer the best.

Can’t say this better than Rudyard Kipling who wrote –

“If you can keep your head when all about you

 Are losing theirs and blaming it on you;

If you can trust yourself when all men doubt you,

But make allowance for their doubting too;

. . . If you can meet with Triumph and Disaster

And treat those two impostors just the same . . .

Yours is the Earth and everything that’s in it.”

Lesson #5: Transparency begets Trust – Your customer is part of your team too and has a right to know all aspects of the situation – good or bad. Do not operate in a black hole. Take time to communicate the goal, the plan and the pros and cons of the plan clearly to the customer to empower her to make an informed decision. For a patient, there is nothing more frustrating than not knowing or understanding why she is being subjected to more treatments (and pain). Explaining to her and letting her know the plan makes her feel that she is in safe hands and be a more willing participant in the process.

“This world is your best teacher. There is a lesson in everything. There is a lesson in each experience. Learn it and become wise. Every failure is a stepping stone to success. Every difficulty or disappointment is a trial of your faith. Every unpleasant incident or temptation is a test of your inner strength. Therefore, nil desperandum*. March forward hero!”

― Sivananda

*nil desperandum (Latin): nothing must be despaired at

What scenarios or personal situations have made you to reflect on customer management? What would you have done better? I would love to know.

P.S: Heartfelt gratitude to my twitter and online friends who have given me so much love and support and prayers for my mom.