SOI 2015 - Analyze Your Business Opportunities
Distributors Need To Use Data Today To Compete More Effectively
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Distributors need to use data today to compete more effectively.
The numbers are in, and they’re an indictment of company operations today: Less than half (45%) of small-business owners use customer analysis to inform better business decisions, according to an American Express OPEN Small Business survey. That’s down sharply from 2014 when 65% did so.
The trend is also reflected in the ad specialty market, where distributors tend to shun data analysis tools that could help improve their operations and target their sales and marketing efforts more effectively. According to the State of the Industry survey, less than half of distributors (46%) said they track individual client profitability, while a mere 30% said they analyze the lifetime value of each of their clients. How can a company fully understand which clients they should focus their resources toward without knowing the clients that provide the best profitability and lifetime value?
Further, distributors aren’t using their client data to determine the best markets and sectors for their businesses. Only 24% say they segment clients and offer enhanced services to certain segments. And, only 21% report that they track successful client promotions and calculate return-on-investment for clients. With online companies swimming in a wealth of client data, and customers increasingly demanding proof that their promotional product purchases are valuable, this neglect of data analysis is something that industry companies are certainly going to have to change.
Deep Data Dives
Companies that fail to do data analysis to gauge a company’s health and growth potential as well as its market opportunities stand to diminish profits and margins drastically, experts say. So why aren’t they doing so?
“Time is the biggest reason,” says Alice Bredin, an American Express OPEN Small Business adviser. In fact, 42% of respondents to the American Express OPEN survey said time was the major factor in why they weren’t able to better analyze the success and future growth of their companies.
For companies, particularly small ones, struggling to find time, automating their processes and analysis is one way to make tracking their business easier, Bredin says. Then, designate a time to review the data, “like the last Friday of the month,” Bredin says, so that information doesn’t go unused.
In looking at data, however, too often companies analyze the number in “broad strokes” rather than the “granular results,” says Tina Wisner, vice president of data science and analytics at KrE8 Media Inc, a media and brand advertising firm. Wisner adds that too often companies, particularly small businesses that don’t have adequate staff or time to properly analyze data, look at one data point and miss the larger picture. At a minimum, Wisner says, distributors should complete a “trending analysis, looking at the flow of business from each segment of the revenue funnel, looking at the conversion” rate of each piece of business and then assess where the challenges and opportunities are for that segment.
Need an expert to figure it all out? Experts say they’re readily available, thanks to the growing field of big data analytics. College students often work for free, or for class credit. Other firms, such as Salient Management Company, a consultancy that advises firms on profitability strategies, only charge $100 a month to start the process. Hiring an outside firm can be critical for distributors looking for more advanced analytics.
For those who want the basics, though, gathering at least some information can be done via Google Analytics and Excel for free, says John Kelly, head of Berkeley Research Group’s Predictive Analytics practice, a strategic advisory consultancy.
That’s exactly what Rector Communications LLC (asi/305623), a fast-growing distributor firm based in Indianapolis did, says Thomas Rector, the company’s CEO. A seemingly simple business can get complex very quickly, Rector says.
“When you start adding multiple salespeople and multiple suppliers and a customer orders five different things from five different places, it starts to get really complex in just the sheer variables involved.”
So Rector created an Excel reporting system (and hired a staff member to input data) to track data in 2014. His discovery? Overage charges by suppliers coupled with charges that got lost in the system and a plush bonus program meant that Rector’s margins were closer to 36% as opposed to the 42% he had thought his company was attaining all along.
“I’m giving bonuses to reps for hitting certain margins and thresholds that actually weren’t true,” Rector says. Since monitoring company data and individual client profitability more closely, Rector says, the company has been able to pull profit margins back up to 48%.
For other companies in the ad specialty market, simply starting to pay attention to “softer” expense factors that impact each client can be beneficial. You already know the cost-of-goods that you pay for client orders, so figuring out net profits is a simple calculation. However, the net profit of each client should take into consideration other expenses that have to be allocated among your complete client base – things like employee salaries, office rent, T&E charges and utilities charges should be added to the client profitability equation.
One way to allocate these charges to clients is to total them and then divide them by the percentage of your overall revenue that each client stands for. So, for example, if one client represents 25% of your overall annual revenue, then to figure out that client’s real profitability to your business, you can allocate 25% of those overall expenses to that client. This will give you good insight into how each client is impacting your overall profitability.
Once a distributor understands what’s driving revenue and profits, they can really start to forecast more strategically, says David Giannetto, author of Big Social Mobile and senior vice president of Salient Management Company. The key, he says, is for distributors to reverse the trend that less than half of all distributor firms actually track individual client profitability. That’s a place that doesn’t take a major investment in technology or systems, but does reveal plenty about the health of a business – as well as its capabilities to compete more effectively today.
Internet companies are causing prices to decrease in many popular product categories – such as pens and T-shirts – and distributors need to ensure that they’re not allowing their profit margins to shrink as a result. Of course, experts say, you can’t have a full handle on your cash flow and profitability without analyzing individual client profitability on a regular basis.