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Business Insights from Andrea Hill

The building blocks of profitability are clear, and they even have a required sequence to them. But without knowledge of the building blocks - or awareness that these building blocks even exist! - your business will suffer.

First Things First: There's an Order to Profitability

Originally Published: 15 May 2013
Last Updated: 25 June 2022

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Our son was insanely bored in high school and we didn’t have better education options where we lived at the time. So we let him get his GED and finish early rather than ruining education for him forever. When he entered the University environment we discovered something very quickly. He had not developed the writing skills he needed to express his ideas effectively and at the level of a university student. He worked extra-hard his first semester and caught up, but it was an important lesson: building blocks and foundations should never be underestimated.

I encounter a similar situation with small business owners on an almost-daily basis. The building blocks of profitability are clear and they even have a required sequence to them. But without knowledge of the building blocks – or awareness that these building blocks even exist! – business owners suffer for years (or decades) trying to turn the corner and achieve true profitability.

What Happens When You’re Out-of-Order

Many years ago I joined a company that had not been profitable in some time. I attended a trade event where I had the opportunity to meet customers, and I asked the same two questions of each of them:

  • How do you feel about this company?
  • Are we your primary supplier?

To the first question I received raves: “We love you!” “You have the best salespeople!” and “You are the nicest people” were among the most common responses. But the answer to the second question was consistently a firm “No.” How could that be? The answers were varied but all shared the same theme:

“You’re always late.”

“You’re constantly out-of-stock.”

“You make a lot of mistakes.”

“I often have to wait for you to figure out what’s going on with my orders.”

“Your prices are too high.”

“The quality of your products isn’t consistent.”

In that company we were paying premium dollar for the best salespeople we could find and training them extremely well. We also had a strong emphasis on treating customers very well. On the one hand, it’s a darn good thing that we did, because that seemed to be the only thing keeping the customers coming back. But do you think that the money we spent on sales staff – very likely more per person than our competitors were spending on their sales staff – was yielding better bottom line? No, it wasn’t. Because we were undermining all that terrific customer value with terrible operations.

Value Comes in Waves

Wave 1: Operations

If you want to see bottom line profits, the very first thing you must focus on is your operations. To achieve strong operations you must achieve the following things:

  • Efficiency in everything you do and touch
  • Tight control over product costs and purchasing behaviors
  • Excellent inventory management at all levels – from finished goods to components and raw materials.
  • Well-defined processes that ensure your staff works with efficiency and consistency
  • Well-defined roles and responsibilities
  • Quality built into all production processes (and not just policed at the end)
  • Metrics in place to monitor your performance in all operational areas (sales, manufacturing/production, product development, marketing, purchasing/inventory control)

If you have terrific customer service and terrific products – but your operations are weak – you risk throwing away all that extra value on the customer dissatisfaction, bloated costs and bloated inventories that come with poor operational controls. If you want to see your profit picture turn rosy, focus on operations.

Wave 2: Customer Experience

Once your operations are in strong working order, then next Value Wave comes from Customer Experience. To deliver the kind of customer service that turns happy customers into profitable customers, you must focus on the following things:

  • Face your customers with sales staff and service staff of the highest quality – in personalities, positive energy, professionalism, training, effectiveness, and warmth.
  • Achieve maximum dependability – orders on time, at quality expectations, call-backs when promised, prices within expectations for your market, the right products available, and strong inter-dependent relationships established.
  • Improve your product and service offerings in a strategic way to turn occasional customers into regular customers
  • Include customers in your product selection and development. Ask their opinions and invite them to offer ideas. Letting customers behind the veil of your organization is a fantastic way to help them feel integral to your business (which, of course, they are!).

When you compare the lists of what you must do to achieve operational value and what you must do to achieve customer value, clearly it is next-to-impossible to achieve the customer portion without first accomplishing the operations portion. And that’s the point of the value waves – each wave of value commitment lays the groundwork for the wave that follows.

Wave 3: Product Offering

Once you can deliver operational and customer experience excellence, your products will yield greater profitability and customer enthusiasm. Many retailers to lean hard on product offering at the expense of the other two waves, but that just doesn’t work. Of course, you can’t coast on products once you get to this point either. Strong merchandising strategies include:

  • Offering the right products and price points for your target market
  • Constantly introducing new products (that’s right – not just once or twice a year!) to keep customer enthusiasm and interest high
  • Moving aged, tired products out of the store (customers tune out when they see the same old things over and over)
  • Moving merchandise around to create a fresh look and new interest

This week, take some time to analyze your operations, customer experience, and product offering. Consider the improvements you would like to make in each area, and then look at how improvements in a “prior” wave could make the difference. You may find that improvements you have tried to make for a long time are finally within your reach.