[Video] In volatile markets, profitability is king

This morning I sat down with Jeet Mukherjee to chat about strategies and tactics to increase profitability quickly as market volatility continues to be unpredictable. We also discuss where we've seen success with these strategies amongst our clients, and how to avoid complexity in your pricing.

TD: Welcome to today's episode, this is Tracy Dent and Jeet Mukherjee with Holden Advisors. Today's topic is profitability. So I just read this morning, yesterday's inflation report sent the market into its deepest dive since June 2020. A lot of companies are still experiencing high demand. So it's like... we're up, we're down, moving targets, constant change. This is where we are this year! And last year. And the year before. How do companies think about profitability versus revenue right now?

JM: Yeah, I think it's interesting, right? I think that's probably one of the biggest changes that we've seen with clients. Because even though every company wants to talk about profits, their action, their processes, and everything is really geared towards getting those big accounts with big revenue. Revenue has always been king. And when market is hot, as you can imagine, the tide goes up and all the boats go up as well. So I think that's what was happening for many years. And then with inflation, with a volatile market, people really need to pivot and focus on profitability.

JM: The key to profitability is it gives you a larger margin of error in a volatile market, to be able to make different strategic choices. So if you want to go after risky business, you can do that if you have a good cash flow or cushion of profit. That's fair. If you want to try to build a different product or solution, you can do that. You can try to do these different strategies and make mistakes and still be able to cover it up versus a competitor that may not have focused on profitability, who's gonna go out there and if they make one mistake, they're basically in the red and they're in trouble.

JM: So I do think switching to profitability in a volatile market is definitely key.

TD: Then also, with all the change happening, it kind of shifts things... how do you focus on some quick wins while also working on the longer term strategy? One of the we were talking about is discounting as one of the places where people leave a lot of money on the table.

JM: Yeah, discounting is a great way to start right. We had one client that basically, as soon as the inflationary market started kicking in, they basically globally said, "No more discounting. Stop discounting." So they didn't raise prices in the beginning, but they said no more discounting. And that gave them a market pop right there right from the get go. And then that gave them a little bit of time to think about where the input costs were going up. So they can strategically change pricing where they need it. So I thought that was a great way to do it.

JM: The only thing that I will add to discounting, even though it's a great place to start, is you really have to know the difference between market-driven discounting and behavioral discounting, or undisciplined discounting. Because if it's market driven discounting, the market is trying to tell you something. It's trying to tell you something is off between the value that you're delivering to your customer and the prices that you set. So that to me is healthy. Meaning healthy that the markets kind of trying to talk to you about the fact that your prices may not be correct.

TD: It's not just like bad habits.

JM: That's right. It's not bad habits. That's right. Thank you. And then if you look at the behavioral side, I'll I'll do an easy one that it's always kind of fun to talk about is. We see reps that only discount like 5, 10 15, 20, 25. Whole numbers. And you wonder, "Oh geez. Why? What could six, or six and a half percent discount of that do?" And so that's a behavioral thing. I mean, that's an obvious behavioral thing, and there are actions that you can take to correct those behaviors.

JM: We also see reps, if they're selling product XYZ, they sell it at 20% discount. If they're selling ABC products, they're selling at 20. If they're doing you know, T products they're selling at 20. So it's like a behavior that's like, "I'm at 20, I'm never going to change. I'm going to stick to 20, it makes my customers feel good, therefore, I'll do it." So those things are easy to identify, and it's a great place to get started to for quick correction and a pop in margin to eliminate that undisciplined discount.

TD: Another place that has been coming up pretty frequently lately is this idea of a flanking product. So how do you find those? Why should people do them?

JM: Flanking products is one of my favorite strategies to use when we think that the market is going to go into recession. Just theoretically, if you think about it, recession means a shrinkage in demand. Demand is going down. So your competitors are obviously thinking about different ways to maintain their profitability or increase their profitability. So if your customers are thinking that way, they're obviously thinking about testing other products and solutions that may be at a lower cost, and still maintain some level of value for them and their ecosystem so they can move on to what they're doing fast as far as their businesses go.

JM: It's critical for us to understand if we're going into a volatile market, specifically a recessionary market, are those customers likely to test alternatives at a lower cost? If they are, and we don't have an offering, it's very important for us to figure out whether we should have that offering at the lower end, because that enables us to keep that customer within our four walls. We know that this is a long term game. It's not short term, (you know, this transaction or this month). We're trying to figure out: How do we keep these customers? How do we maintain long term profitability, not just the profitability of today or this month? So it's crucial for us to have a strategy like a flanking product strategy, where we align a lower cost to a lower value product, for a segment of the market that is trying to look for alternatives.

TD: I would imagine if you're creating a lower value product intentionally, you would also have to keep a really strong fence so that you're not giving away value. Like, the whole point is that it's also less resource heavy for the company too. So that's another place you've got to hold the line.

JM: Yeah, that's right. You know, that's a great point, and I'll say it in a flip way. The bad habit we see clients do all the time is take their high value product, that's selling into a high value segment, and what they do is say, "Market is bad, my customer's down, I'm gonna discount this down." And what you just did was erode all your value in the marketplace. And you've told your customer that this much value that I deliver to them, is now equal to this new price which is at a low level.

JM: So when the market goes back up, it's gonna be very difficult for you to get that price back. To protect yourself, you have to understand what those high value segments are and you have to completely fence those off. So you don't marginalize those products with this low value flanking product strategy that you are going to put into place.

TD: It also frees up, ideally, resources to be able to work on other things.

JM: Yeah, absolutely. Your whole idea is to create some level of low value where the customer feels the pain. They shouldn't be able (I'm exaggerating to make a point), be able to call your customer service 24/7 and be able to ask for anything they want whenever they want to. Because you need to strip some of that value out of there in order for them to feel that pain. "I'm going to give you customer service from nine to five," as just an example.

TD: Okay, which then takes me to my favorite which is firing the unprofitable customer. So we've got different ways right to... we use this term "stop the bleeding".... but to have some profitability wins in the short term. Another one is to look at your unprofitable customers and make some changes there. So how do you approach that?

JM: Yeah, this is one of my favorites. People are always shocked when we're doing presentations and things and we say, "Fire your unprofitable customers." I'll give you an example. I have a friend of mine that runs a reseller business. Through COVID, he went from having 600 ish transactional customers to around 250 or so. And what he did was close to doubling his profits. He was able to maintain a level of customer service, and he was able to focus on really the value partners that he has.

JM: Sure, his revenue went down so I don't want to discount that. If you're measured on revenue only, I get it. I totally get it. But you know, getting that extra profit through COVID. Now he's got that flexibility to use a lot of different strategies to get through this volatile market. He's got that cushion. And the best part is, who are the customers you get rid of? Obviously, they're the bad ones, which means, your employees are happier, they don't have to deal with them and your competitors get them! Fantastic! Now the competitors can deal with unprofitable customers.

JM: And, if you ever want to get them back, they're typically the price buyers. So you can always reduce your price and get them back tomorrow in a transactional environment and it is not a problem whatsoever. So I think it's very important to understand your customer base, to see which customers are truly adding value, who are your partners, who are your advocates, and who are the ones that are not.

JM: Now, you don't want to take the entire base of your customer and say that you want to fire this whole customer base, and you probably don't want to do that. I think there are ways that you can increase profitability of those customers as well. So you have to go through an exercise and say, "Okay, if this person went from net 15 terms to net 60, what would their profitability look like? And have an action plan for those customers."

JM: Just like anything else, you probably have a very high spike of customers that are profitable, this side, and then you probably have a huge amount in the middle that are right around break even. That's right around zero. Then you've got a spike on the low end of customers that are completely unprofitable. And that's probably what your graph looks like if you analyze it correctly. Based on not just your project costs, but also cost to serve. If you add those up, that's probably what your graph looks like.

JM: For that middle section, there are probably little tweaks to make to impact profitability, but you don't have to be that drastic. Then there will be a group of customers that it's best that your competitors serve them rather than you.

TD: So yeah, cut ties with those. So we've been affectionately calling these three strategies, "the quick hits." When you're looking to make an impact fast. We'll see more of these in the next couple of months and we'll talk about examples and places where we're seeing them come to life, customer wins.

JM: I think sometimes pricing, especially in a volatile market, is overwhelming. Because there's so many things going on. It's not as easy as oh, we're in a recessionary market or we're in an inflationary market or stagnation or whatever it might be. Stagflation, it's not as simple as a one variable effect that your business is going through. Therefore, only one or two variables need to change and you're going to be okay. It's a very complex environment.

JM: Businesses are complex. Your products are complex, you have some products that are going to be affected by inflation, other phones, others will be like, Oh, no problem, even if we're affected a little bit. Demand is so high, it's not a problem. And then you're going to have other products that are completely in a recessionary market already. So you have to be able to understand these things and not get overwhelmed. Hopefully we've designed a few products that we can help our clients with that are a quick start, that say, "Okay, hold on, there is a lot going on. But here's a here's a quick way to get started to get you a little bit of a breathing room, and then you can figure out what you need to do for long term."

TD: Yeah, yeah. Exactly. The other thing we've got going on is the book launch in a couple of weeks, right so all of these things are also leading up to this around for the book. The principles of pricing in inflationary markets, increasing profits. So that's October 18, Pricing with Confidence second edition.

JM: I'm super excited.

TD: You can order it on Amazon. And can't forget Barnes and Noble.

JM: Right. It's my first book, so I'm very excited about it.

TD: Yeah, it's gonna be great. That's October 18. The next day is the workshop at Professional Pricing Society conference in San Francisco, that's Pricing with Confidence workshop with Pete Morelli. And at the end of September is the opening keynote for Ardensi's USA Pricing Summit. In Houston, September 30. So you've got a got an exciting fall coming up.

JM: Yeah. Looking forward to it.

TD: Me too. Next, we'll do another roundtable, probably next week around one of these topics. See you soon!