When I hear people talking about sales goals, they’re almost always referring to gross sales ie. “I want us to achieve £5,000,000 in sales this year and then for our sales to grow to £10 million, £100 million, and so on a so forth.”
But, should that be the over-riding target? Which is more important…gross sales, or net profits? Particularly, if you are looking to maximise the value of your business and contemplate an exit at some point, shouldn’t the goal be to increase net profits? It just doesn’t always necessarily follow that if you double your sales you are going to double your profits.
In many cases quite the opposite happens. Sales may increase, but the profits lag far behind. One of the main reasons is that firms get caught up in acquiring customers by any means but not the RIGHT customers therefore having an adverse affect on their profitability.
Perhaps a better idea is to consider pruning your business from time to time…stop servicing the unprofitable and time consuming accounts…so you can reduce your costs and dramatically increase your profit margins.
Pruning is a concept traditionally connected with gardening but lessons can be learned from gardening and applied to business to understand what to prune and when is the best time to prune.
However, one size does not fit all as one style of pruning, whether in gardening or business, may work for one type of plant/business but may literally kill another. Here’s a few “Pruning” tips to help you get started thinking about pruning your business:
Your selection of clients that you want to focus on and those you would like to give up needs to be well thought through and based on real data and criteria. Putting the work in at this stage will stand you in good stead in later pruning rounds.
In gardening most pruning will be done with a pair of secateurs. However, these will not be appropriate if you are working on a tree with large branches. Its the same in business, you have to carefully consider what tools (email, letter, personal visit, phone call etc etc) is going to be the most appropriate tool to use if you decide to stop working with a certain customer. The danger to be aware of is how the customer will react depending on the way and how you communicate and what impact that could have on your business. That shouldn’t stop you going ahead, you just need to careful.
Most perennials go through a period of dormancy (ie. hibernation) every year when they stop growing and no longer produce fruit. In business, by careful not to prune a customer that has not done business with you in sometime. They may just be dormant. Situations like this can offer great opportunities to ‘wake’ up that customer again.
The rule, with plants, is that they shouldn’t be pruned during their growth cycle. This is important to remember in business too as certain customers and products/services will grow through growth cycles. Which leaves autumn (fall) and late winter as the best times to prune.
With these thoughts in mind, let’s consider the situation a former client, Simon, found himself in.
Simon owns a manufacturing agency company, doing nearly £6 million in total sales. The manufacturers pay his company commissions of 30 percent, so his organization earns £1,800,000. It costs him £1,500,000 to pay his 50 employees and other expenses, so the net profit this business was around £300,000.
He has nearly 600 accounts, but the bottom two hundred don’t do much business with him. They do, however take up a lot of the sales and service department’s time, effort, and attention.
Doing an analysis, Simon discovered his 200 smallest accounts spent only $500,000 with him…but took up over one-third of his company’s available time.
As we considered the implications he came to these conclusions:
“Pruning” his business was the first step in Simon’s plan. More on what else he did in a later post.
Have you ‘pruned’ any customers? What have you found is the best way to communicate and manage that process?
Thanks to Tracy27 for the photo