Increase Your Profits? Show Me Your “Whale Curve”
On a scale of 1 – 10 (one being not strategic at all, ten highly strategic) how strategic would you say your pricing is with your customers?
Do your sales teams’ price your products and services based on cost plus or value?
Do you have price tiers and discount structures?
Do you price by market or do you have one price for all the markets you serve?
Do you know what percentage of sales transactions had price overrides in the past twelve months?
If these questions make you pause or feel a little nervous, you are not alone. Far too many companies are breaking even and often losing profits on the majority of their customers without realizing it.
There is a solution. Every business has a Whale Curve.
One of the quickest ways to stop the bleeding and improve profits is using your Whale Curve to identify accounts that are not profitable and create strategies to make them profitable.
For years we have heard how the Pareto Principle, or 80/20 rule, can be seen everywhere in sales results. In business, 20% of your customers produce 80% of sales. Within those customers, 80% of profitable sales are often generated by only 20% of your salespeople.
Unfortunately,even Pareto’s 20% number is shrinking to 17%, and we are experiencing a shift with up to 90% of sales now being delivered by 10% of customers for some companies.
We need more than Pareto to fix this sales and profit problem.
Traditionally, Sales Leaders work with sales teams to create strategic account development plans for LARGE key accounts.
We help our LARGE accounts improve their sales and profits, and
we grow top line sales in the process. This model has worked for years. When key account sales increase, CEO’s are happy (OK, happy is not the right word because we
can always sell more, am I right?), but if we bring in the sales and profit numbers they require, they have happier board meetings.
That strategy addresses LARGE key account sales, but what do we do with the smaller and small accounts that often create a great deal or equal amounts of activity and cost of sales but contribute little if any to the bottom line?
In April of 2019, I was asked to join SPA and SPASIGMA as the Vice President of Sales and Marketing. Since 1993, SPA has helped their customers improve their bottom-line profitability leveraging pricing analytics with proprietary tools, processes, and training.
When I am asked to serve a team and their customers I prefer to start in the market and
listening to the voice of their customers. During my first week with SPA, I met with one of our customers and listened to our team share how we have been on a strategic pricing journey with this account for the past few years. This key account’s customer price analysis and strategic pricing recommendations has resulted in an incremental $110,000 to the bottom line per month.
In the next meeting, the numbers were even more impressive: SPA’s work has added an
additional $26 million of incremental profits since starting their strategic pricing journey in 2015.
I have always focused my energies on helping sales teams with sales enablement, capturing the voice of their customers, and teaching their organizations to serve their customers and markets with a value based sales and price strategy. As I continued to have meetings with client partner after client partner, I grew surprised how little I knew about the Whale Curve.
Leading sales teams, I have always had several reports at my disposal. These reports show sales, sales by customer, sales by market, sales by region and sales by salesperson.
Each of these reports also showed profitability by customer, market, and salesperson. In addition to growing top-line sales, I often challenged sales transactions made at profits below targeted market pricing.
The one report I didn’t have was the Whale Curve.
Knowing what I know now, I wish I had because it would have been helpful.
What is this Whale Curve?
The Whale Curve shows you accounts where your team is making healthy profit margins and accounts where you are breaking even and where you are losing profit dollars with each transaction.
In a whale curve, customers are cumulatively ranked by profitability, from highest to lowest.The resulting curve is said to look like a whale coming out of the water.
Looking at the right side of the curve can be alarming because you can visually see the impact of the bottom customers draining your overall business profit.
According to Harvard Professors Robert Kaplan and V.G. Narayanan, the 80-20 Pareto rule does not apply to customer profitability for organizations.
The whale curve for cumulative profitability reveals that the most profitable 20% of customers generate between 150 – 300% of total profits.
Let that sink in a minute….if that’s true why is your business not more profitable?
The middle 60 – 70 % of customers break even, and the least profitable 10 – 20% of customers cause a decrease of 50 – 200% of total profits, leaving the company with its 100% of total profits.
Put another way, your bottom 20% of customers is draining your peek operating profits and in so doing you realize the profits you see today.
On the profitability whale curve, the difference between the highest point of the chart and current company profitability (100% profitability) represents unrealized profit potential for the company.
The average organization has both customers having a positive impact on company profitability, and customers who negatively impact potential profits of a company by generating less revenue than costs – creating a negative effect on company profitability.
Often even managers who understand the issue are not able to easily distinguish between
customers belonging to these two groups because they lack a price analytic tools that include the cost of sales.
The total sales size of customer does not always show the customer is automatically the most profitable; in our experience, the largest customers may turn out to be the most unprofitable.
How did customers not know?
When a manufacturer and or distributor has 1.000’s of customers and over 40,000
SKUs over time, 100’s of salespeople, various price programs, numerous product groups and many locations you would be surprised how often we see it.
How does this happen and why didn’t they see it in their monthly reports?
Is this something that happens slowly over time or is it something in response to new
competitors?
What is the best way to solve this problem?
How long does it take to identify customers and their profits and plot them on the Whale
Curve?
What are the best practices for improving profitability in managing the whale curve data?
How long does it typically take from the day we share the whale curve data to improved
profitability?
How much profit should a company expect to improve in the first 12 months?
How do sales teams react to this data?
Are most sales teams trained and capable to negotiate price increases?
Why not just cut the tail off the whale? Wouldn’t that quickly fix the problem?
Is the pricing analytics exercise a one and done exercise or something that happens over the years? Why?
What I am finding is the Whale Curve is a valuable tool to help companies realize what
accounts are driving their profits, what accounts are at break-even, and what accounts are eroding your profits. In essence, the tail of your whale is eroding your total gross margins the longer it is allowed to swim freely without price guidance and a strategic pricing methodology.
As I learn more about the Whale curve and pricing analytics, I will post content so we can all learn how to improve our profits and the bottom line in the hyper-competitive markets we serve today. We will answer the above questions and many more to help you and your teams improve your profits and gain a higher return on the value your organization provides.
Have you heard about the Whale Curve before?
If so, what did your team do to improve your profits?
Did you cut the tail off the whale or did it take on a new shape over time?
What are some other applications for the Whale Curve that can help us make better decisions?
Are there other cost considerations companies are not considering when they build their Whale Curve?
