As a CFO, it is crucial to prevent Margin Leakages, or missed margins, at the customer level. To do this effectively, it is important to identify and address these leakages. Leakages include the Cost to Serve, Customer Acquisition Cost and also the Cost of Logistics discussed in a previous article. These costs can vary by customer or customer group which can lead to leakages if not adequately managed. Following are actions to get a handle on this phenomenon.
Analyze margin at the customer level
Start with a detailed analysis of margins per customer by understanding revenues and costs at the customer level. For example, Bijenkorf could map what costs are incurred in the physical stores, such as in-store promotions, and attribute this to customers who buy in these stores. This might reveal that these activities do not lead to additional revenue compared to customers buying through the web shop.
Implement segmentation strategies
Customer segmentation can significantly improve the focus and allocation of resources. Telecom giants such as Verizon and AT&T segment their customers based on usage and profitability, offering premium services to high-value customers while supporting service offerings for less profitable segments more efficiently by deploying chatbots, for example.
Optimize the Cost to Serve
Map out the value drivers of Cost to Serve and determine if there is sufficient revenue in return. For example, more and more online providers such as Bol and Amazon are offering subscriptions for shipping and returning orders. This promotes customer loyalty and provides a predictable revenue stream.
Monitor pricing models
Dynamic pricing models can adapt to changes in (service) costs. Ridesharing companies such as Uber and Bolt change their prices based on real-time supply and demand, helping to more effectively manage operational costs while maximizing revenue per ride.
Manage the Customer Acquisition Cost
Efficiently managing Customer Acquisition Cost is crucial. A digital marketing agency could analyze the performance of different advertising channels to identify which ones deliver the best ROI, and focus budget allocations on high-performing channels to reduce wasted spending.
Standardize and streamline logistics
Logistics costs can vary widely and affect margins. A company like IKEA focuses on flat-packed furniture, which significantly reduces shipping and storage costs. This standardization enables economies of scale and lowers overall logistics expenses. For example, Undiemeister uses a graduated discount, to sell more quantities at a discount associated with the number of items ordered. For each additional item ordered, shipping costs are reduced.
Deploy technology for data insights
Invest in Advanced Analytics and BI tools to get a better picture of customer behavior, cost drivers and profitability. A company like Walmart uses big data analytics to optimize inventory levels and pricing strategies, reduce costs and improve customer satisfaction by ensuring product availability is aligned with demand patterns.
Continuous Improvement
Develop review mechanisms to monitor whether actions to reduce margin leakages are effective. This includes not only financial reviews, but also operational reviews and customer feedback. This can lead to reviewing processes.
The feedback loop is an important tool for monitoring process efficiency. With financial and operational reviews and customer feedback, you gain insight into the effect of improvement actions. And it gives insight any unforeseen pitfalls.
Conclusion
Preventing Margin Leakages requires a focused approach to analyzing, segmenting and optimizing the interactions and costs associated with each customer. By adequately handling and possibly anticipating them, companies such as Amazon, Uber and Walmart can not only maintain profitability but also increase it by smartly deploying customer-related spend.
