Increase Profitability

Zeroing in on Profitable Market Segments

How to Use Profitability Data to Drive Smart Growth

Woman on computer
 

Tracking revenue by customer or product comes easily to many businesses but getting at profitability by market segment has been another matter. The ability to measure segment profitability is vital to the attainment of the most important goals and actions. Business executives report that growing/increasing profitability are their top business goals with 27 percent of business executives planning to go after a new customer or market segment.1 Capitalizing on profitable market segments and cutting unprofitable ones is high on the list of priorities.

Simpler-to-use, more intuitive accounting software has become widely available and has improved decision makers' visibility into profitability by segment. It is becoming easier than ever to identify sources of profits and losses. Accounting data used to measure profitability provides the knowledge base to guide where to grow, where to optimize, and where to cut losses. Properly structuring your accounting and financial reporting system can provide standardized reports that answer key business questions:

  • What segments or customer groups are most profitable?
  • Who are your company's most profitable customers? Least profitable?
  • What are your most profitable products and/or services? Do you have a loss leader?
  • Which customers, products or services offer the greatest future value?

Using Profitability Data to Drive Smart Growth

Driving smart growth with targeted strategies by market segment starts by defining those segments and gathering profitability data. The following four steps can get you underway.

Step 1 — Create Meaningful Customer Segments

Start by making your accounting system specific and meaningful to your business and drivers of growth. Based on previous accounting data, analyze each customer and sale from the previous year and identify common characteristics. With this history in mind, you can create categories for customer groups. Design enough categories that you can mine your accounting data for opportunities but not so many that the data is difficult to gather and track on an ongoing basis.

Create customer categories and sub-categories using variables such as:        

  • Ownership (government vs. business vs. consumers)
  • Industry
  • Size (revenue, number of employees, income)
  • Distribution (online vs. retail vs. wholesale)
  • Purchase frequency and customer history
  • Demographics (age, gender, ethnicity, lifestyle)
  • Source of business (marketing program, referral, etc.)

Helpful Tip: Develop and document consistent definitions for each category for easy understanding by anyone who enters customer information into your system.

You can also look at job proposals to help you think about business you competed for and your success rates in landing different types of customers and jobs. This history can help define the growth strategy as you reach for new product offerings or customer segments.

Step 2 — Create Meaningful Product and/or Service Groupings

Utilize the same methodology as above for your products and/or services. Identify groups of your products and/or services you want to track to gain valuable insight for the future. For example, you may want to create groups around:

  • In house-manufactured stock items
  • Outsourced production items
  • Customized products and tailoring services
  • Design and installation
  • Shipping and handling
  • Ongoing maintenance contracts
  • Other professional services

Think about groupings of products and services with comparable production processes, labor inputs, workflow, cost structure and margins.

Step 3 — Assign Direct Costs to Customers and Jobs

Most businesses track basic direct cost information such as labor and materials. Build on this information by having your accountant set up your accounting structure to assign direct costs to specific jobs and customers. Your accountant will be able to assist in auditing and revising your cost data gathering approach to allow it to be tied to individual jobs or customers. You may need to revise or implement timesheets or other record keeping to connect hours to specific jobs and customers or to add job numbers to invoices to track material expenses.

You can then assess profit margins on specific customers, products and services. Share your goals for tracking profitability with employees so they can understand the outcome that you are working towards. Employees sometimes resist the implementation of timekeeping because they misunderstand the objective of the exercise; sharing that you are studying segment profitability can help get them on board with more accurate and/or additional timekeeping requests.

Step 4 — Use Segment Reports to Focus on Pockets of Profitability

With your newly organized database, you will be able to generate profit and loss statements by product, project/job, or customer. Filter these reports based on the groupings you have developed, and you can now quickly and easily generate reports showing profit margins with specific insight to what drives the cost structure for each category. For example, you may find that certain jobs cost more than you thought when you were only looking at expenses in aggregate.

To fully leverage this information, use company forecasts, industry data, and competitive analysis to establish benchmarks like:

  • Targeted sales size
  • Targeted profit margin by group/segment
  • Employee efficiency ratios

Use this information to create strategic customer and product plans to prioritize and allocate resources more effectively. This can help outline segment growth strategies for your business plan. Conversely, you can analyze the pockets of unprofitability to determine the types of projects to avoid or products to cull.

Helpful Tip: Compare your actual profit margins by customer, products and services to forecasts and benchmarks on a periodic basis throughout the year to monitor market changes.

SunTrust is ready to help you gain insight into your financial data.

Contact your SunTrust Relationship Manager to discuss ways SunTrust can help you as you grow your most profitable market segments.

1 SunTrust Research, Q1 2018.

This content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

Related

Investment and Insurance Products:

Are Not FDIC or any other Government Agency Insured   Are Not Bank Guaranteed  May Lose Value 

© 2018 SunTrust Banks, Inc

equal housing logoSunTrust Bank is an Equal Housing Lender. Member FDIC

equal housing logoEqual Housing Lender. SunTrust Mortgage, Inc

SunTrust, SunTrust Mortgage, SunTrust PortfolioView, SunTrust Robinson Humphrey, SunTrust Premier Program, AMC Pinnacle, AMC Premier, Access 3, Signature Advantage Brokerage, Custom Choice Loan and SunTrust SummitView are federally registered service marks of SunTrust Banks, Inc. All other trademarks are the property of their respective owners.

Services provided by the following affiliates of SunTrust Banks, Inc.: Banking products and services are provided by SunTrust Bank, Member FDIC. Trust and investment management services are provided by SunTrust Bank, SunTrust Delaware Trust Company and SunTrust Banks Trust Company (Cayman) Limited. Securities, brokerage accounts and insurance (including annuities) are offered by SunTrust Investment Services, Inc., a SEC registered broker-dealer, member FINRA, SIPC, and a licensed insurance agency. Investment advisory services are offered by SunTrust Advisory Services, Inc., a SEC registered adviser. GFO Advisory Services, LLC is a SEC registered investment adviser that provides investment advisory services to a group of private investment funds and other non-investment advisory services to affiliates. Mortgage products and services are provided by SunTrust Mortgage, Inc.

SunTrust Mortgage, Inc. - NMLS #2915, 901 Semmes Avenue, Richmond, VA 23224, 1-800-634-7928. CA: licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act, IL: Illinois Residential Mortgage Licensee #MB-989, Department of Financial and Professional Regulation, 100 W. Randolph, Suite 900, Chicago, IL 60601, 1-888-473-4858, MA: Mortgage Lender license #-ML-2915, NJ: Mortgage Banker License - New Jersey Department of Banking and Insurance, NY: Licensed Mortgage Banker—NYS Department of Financial Services, and RI: Rhode Island Licensed Lender.

"SunTrust Advisors" may be officers and/or associated persons of the following affiliates of SunTrust Banks, Inc.: SunTrust Bank, our commercial bank, which provides banking, trust and asset management services; SunTrust Investment Services, Inc., a registered broker-dealer, which is a member of FINRA and SIPC, and a licensed insurance agency, and which provides securities, annuities and life insurance products; SunTrust Advisory Services, Inc., a SEC registered investment adviser which provides Investment Advisory services.

SunTrust Private Wealth Management, International Wealth Management, Business Owner Specialty Group, Sports and Entertainment Group, and Legal and Medical Specialty Groups and GenSpring are marketing names used by SunTrust Bank, SunTrust Banks Trust Company (Cayman) Limited, SunTrust Delaware Trust Company, SunTrust Investment Services, Inc., and SunTrust Advisory Services, Inc.

SunTrust Bank and its affiliates do not accept fiduciary responsibility for all banking and investment account types offered. Please consult with your SunTrust representative to determine whether SunTrust and its affiliates have agreed to accept fiduciary responsibility for your account(s) and if you have completed the documentation necessary to establish a fiduciary relationship with SunTrust Bank or an affiliate. Additional information regarding account types and important disclosures may be found at www.suntrust.com/investmentinfo.

SunTrust Robinson Humphrey is the trade name for the corporate and investment banking services of SunTrust Banks, Inc. and its subsidiaries, including SunTrust Robinson Humphrey, Inc., member FINRA and SIPC.