Everybody loves to improve profit margins don’t they? The more profit, the better. Profit is the ultimate KPI. Really, it’s just about the only KPI that matters over the long term.
Rock star executives talk profits, and they are paid outrageous amounts of money to move the profitability needle just a tick or two in the right direction.
When profits go down, Wall Street gets nervous. When profits go up, Wall Street gets giddy, and when profits go flat, Wall Street gets bored.
Almost everything that goes on in a manufacturing business affects profits. For better or worse, actions cause profit-affecting reactions. If you turn up the heat, people slow down and so do profits. Tell folks their shift is competing with the next shift for the productivity prize, and they will turn out more work in less time than ever before. Increased profits!
What Impacts Profitability?
UK entrepreneur, James Caan, CBE, isolates three areas where profit margin can be addressed. These are: turnover, cost base and productivity.
In a specific sense, things like delays, errors, product returns, production defects and pricing mistakes are all examples of things that have a negative impact on profit. On the other hand, increasing sales velocity, eliminating errors, eliminating returns, achieving zero defects and consistently pricing things accurately are all actions that positively impact profitability. These all align with one of the three factors.
The problem with most of these positive actions is they require the human element to work harder, smarter or faster. Humans and behavior modification programs don’t always work out. That’s where technology comes into the picture. Humans love technology, especially when it makes life easier for them.
CPQ Automates Your Quest for Higher Profits
Technology is there and ready to go, which means you don’t have to go through a major transition in how you do things.
CPQ technology facilitates increased quote volume by reducing the time required to spec, configure and price any given opportunity. More time available means more time to sell. CPQ also promotes higher value per quote by building up and cross-selling into the specification conversation in the form of questions related to usage and requirements.
But what about margin? CPQ also has a positive impact on margin by increasing the velocity of the sale, reducing the pricing and configuration errors made during a selling cycle and with reduced likelihood of manufacturing defects.
How CPQ Improves Profit Margins
Let’s look at some of these ideas in more detail.
1. Faster Selling Cycle
CPQ makes the early stages of your sales discussion far more useful than breaking the ice with your new prospect. Guided selling has brought your prospect to you. Your credibility is already established. So, you can lop several months of “getting to know you” discussions out of the way. CPQ will guide your discussions helping you to home in on the perfect solution for addressing your prospect’s pain. This increases the velocity of your selling process.
Faster selling means getting more money sooner. This is tied directly to overhead expenses or cost base in Caan’s triumvirate of margin factors.
David Finkel, of INC Magazine, advocates the aggressive application of cross- and upselling strategies to facilitate higher-velocity sales, as well. He also advocates the desirability of retaining existing customers. Expanding the product footprint with existing customers is far less expensive than selling to totally new users.
CPQ offers great advantages in this strategy by clearly identifying specific options, effectiveness levels and alternatives for any product or product family.
1. Eliminates Errors
Errors can be the undoing of any organization. The spec’ing, pricing, ordering, building and shipping processes all offer opportunities for error. CPQ mitigates many of these.
During the conversation between the rep and the buyer, critical information is shared about the operational requirements of the product. CPQ provides the rep and customer with a series of questions designed to home in specifically on those areas where the product is configured to exactly match the buyer’s needs. This process also ensures that the pricing for the final product is correct.
The information collected in CPQ feeds the ordering system and production systems. Keyboarding errors are minimized because the information is transferred rather than re-keyed. The information created by sales and the customer follows, drives and enables all of the subsequent processes employed to fulfill the order.
Eliminating errors means doing it right the first time. Margins suffer with every error that requires re-doing some step or correcting some process. Elimination of these errors impacts margins by eliminating unnecessary work.
3. Defect-Free Products
The plant schedules production of the customer’s order. The product is built based on the specs supplied to the production system by CPQ. The actual product build is based on inputs from CPQ. This eliminates build defects and ensures that the product built will match the expectations of the customer.
Defects kill productivity because you are running your production facility, consuming supplies and inventory and then throwing away the product of your effort. Defects burn resources and provide no opportunity to recoup what is lost through defective production and product.
Eliminating defects ensures that the expenses and supplies utilized during production are offset by the income generated by the product being built and sold. The more efficient the process, the fewer defects and the higher the ultimate profitability of the transaction.
4. Pricing Perfection
Getting the pricing right is critical. It doesn’t matter if you are “ball parking” an estimate, responding to an RFP or presenting a final proposal; your credibility and profitability are driven by correctly pricing your product and services.
CPQ functions as your “official” price book. The numbers contained within CPQ are tied to the assorted parts and assemblies that are used to configure the product you sell. This facilitates unmated control over pricing variations driven by contract, quantity, location or other value-add parameters.
Additionally, all pricing and quoting is documented, saved and retrievable. There are no mysterious phantom quotes. Nothing is more difficult than rolling back a previously quoted price that doesn’t reflect the ultimate value of the product delivered. These are margin killers. Too often companies end up discounting to overcome these errors.
For purposes of increasing margin, look at your product pricing with a critical eye. Increasing prices offers an easy way to build margin. This is not always an easy call, but some simple math attests to the potential efficacy of price increases.
Australia’s Nick Roberts observes that raising prices by 10% on product generating 50% margin will sustain a 17% customer attrition before negatively impacting your bottom line. By the same token, ask yourself if halving your price generates twice as many customers.
Reducing operational expenses is a direct route to increased margin. These four elements—selling velocity, processing errors, product defects and pricing defects—are prime areas to direct expense reduction efforts toward. Not only do they return value to the selling organization, they also deliver increased value to your customers.
Essentially, every percentage point reduction you produce in your operational expense is reflected as a 4 percent increase in gross profit margin. It is worth it to run efficiently and error-free.