My father used to tell the story of an elderly couple living in a small New England town.
The husband had worked his entire career polishing the cannon on the town green every day. One day, as he neared retirement, he came home and announced to his wife, “For twenty years, I’ve worked for the town, and now I’m going into business for myself.”
“I bought a cannon.”
Stop polishing the cannon
Strategic account management in the most forward-thinking companies is undergoing a transformation that is increasing sales effectiveness and company profitability by 33% or more.
The most effective strategic account managers are shifting their focus from maximizing sales and gross margins, to going directly after major net profit increases in key accounts – without the false assumption that more sales equals more profits. In fact, nowhere is this false assumption a bigger mistake than in major account management.
Strategic accounts certainly have the scale and scope to provide critical revenues and gross margins. They are very important to revenue growth. However, major accounts also have massive power to reduce prices and to extract costly service packages. For most companies, and certainly for most strategic account managers, this pressure is very hard to resist.
This major account power leads to the extremely difficult situation in many companies, in which major account revenues increase while net profits actually decline. All too many strategic account managers find themselves in essence polishing the cannon.
What can a strategic account manager do?
Sell profits, not revenues
The most important factor in strategic account management is the vast difference between selling revenues and selling net profits. Most selling systems simply assume that these are equivalent, but nothing could be further from the truth.
In years of work on maximizing profitability, and in the billions of dollars of annual client revenues that run through Profit Isle’s, my company’s, analytical systems (see www.profitisle.com ), I have found that a surprisingly small portion of a company’s business provides all the reported earnings, and even subsidizes the losses on the remainder of the business.
For example, one very successful, industry-leading company earned over 150% of its profits from about 15% of its business, and an amazingly large portion of these profits were simply eroded away by the majority of the business.
Importantly, a number of the strategic accounts were providing most of the profits, but a shockingly large number of major accounts were key profit drains. And, it was not at all clear at the onset which accounts were “good accounts,” and which were not. This is very typical.
Good accounts, bad accounts
The key to sorting your good accounts from your bad accounts – and your good products from your bad products – is profit mapping. I have explained profit mapping in my Harvard Business School Working Knowledge columns, in my blog posts, and in my award-winning book, Islands of Profit in a Sea of Red Ink.
In essence, you can build a profit map by doing an all-in P&L on every invoice line. This yields a very detailed picture of the company’s profit landscape by account, product, vendor, service, cost factor, and numerous other dimensions. Profit Isle has very powerful software to do this, and to create game plans for profit improvement.
The reason it is critical to do a full P&L by invoice line is that accounting systems aggregate revenues and costs in separate buckets. This makes it impossible to match each of your revenue sources to the cost of generating it.
Think about this: Are all your products priced the same in every account? Is the cost to serve all accounts equivalent? If not, you need to understand how to match specific costs to specific revenue streams on a very granular basis, and this is especially critical for major accounts with substantial bargaining power.
Islands of Profit – profit levers
If, as with nearly all companies, 15% of your accounts are providing 150% of your profits, your most important objective is to secure and grow these Island of Profit accounts. Yet if they are providing only 30% of your revenues, in most companies they will be getting only 30%, or less, of your “love.”
These high-profit key customers are your most important asset. In fact, they probably are not even getting as much attention as your large accounts that are unprofitable, because your big, low-profit customers are always pushing and complaining.
As a strategic account manager, you have three very important “profit levers” to turbocharge the profitability of your Islands of Profit strategic accounts: (1) profiling and account selection; (2) pricing and product portfolio; and (3) supply chain integration.
Profiling and account selection
Think about this: How does your company select new products or new marketing approaches?
Odds are that you do a survey and let all customers have a vote. Alternatively, perhaps you give your big accounts more votes than small accounts. But do you give your Islands of Profit customers, which are giving you all your profits and more, enough votes?
In building profit improvement game plans for our clients, we very often specifically and carefully survey their Islands of Profit accounts. The results are astonishing.
In most situations, the Islands of Profit customers have remarkably similar profiles, needs and views – and these are very different from the overall customer base, and even from the other major accounts. By aligning your company’s products, services, and positioning with your most profitable customer segment, you can directly drive strong profitable growth from the start.
Just as important, when you have a clear profile of your Islands of Profit customers, you can identify their critical characteristics and buying triggers. This enables you to increase profitable sales to existing Islands of Profit customers, and to rifle shot your sales and marketing efforts to identify and land new accounts that have the highest potential for strong, fast, high-profit growth.
In this way, you can shift resources from low-payoff business to high-payoff business. No more polishing cannons.
Pricing and product portfolio
Once you have identified your Islands of Profit customers, you can look at your own business’s best practice in pricing and constructing a product portfolio for these customers.
Here, you can do a comparative analysis of what you are selling to the different market segments of your most profitable customers. Every sales rep is different, and every customer interaction is different. Yet very clear best practices emerge, and nearly always raise a revealing “aha moment.”
For example, many sales reps are afraid to price high, especially for a major product in a major account. One top client manager likened this to a fear of getting a “speeding ticket.” Yet, in practice, the sales rep is much more likely to get a “ticket” in a price sensitive, unprofitable major account than in an Island of Profit account. By understanding the difference in best practice pricing in the accounts in the respective categories, reps are much more likely to price their Islands of Profit customers at market.
The result: very fast revenue growth that is all profit.
Product portfolio – the question of what to sell to an account – has a very similar solution to the pricing dilemma. By identifying the Islands of Profit customers and analyzing best practice set of products bought, you can construct very powerful guidance for the sales reps. Here, again, you are analytically removing the sales to large, unprofitable customers (which we call Coral Reefs) that muddy your understanding of your most profitable (real net profits) strategic accounts.
This creates a clear best practice pathway to fast sales growth in key highly-profitable accounts.
Moreover, we have found that the real super-sweet spot for high profit growth is selling Islands of Profit products in Islands of Profit accounts. By really digging in and understanding these two critical categories, you will be able to laser-focus your selling efforts on where they will pay off fastest and strongest.
Supply chain integration
For strategic accounts, supply chain integration is a prime sales and profitability weapon. I have explained this in my writings (for example, see Profit from Customer Operating Partnerships).
Supply chain integration gives you three critical benefits.
First, you reduce your key customer’s cost of operations, often by 40% or more. These savings stem from reduced inventories, duplication of services, and other factors.
Second, your own sales grow, often by 35% or more in your highest-penetrated accounts. This very fast, massive sales growth is driven by the huge customer cost savings, and by the operating level relationships that develop between your grass-roots operations staff working in the customer, and the customer’s counterpart operations managers.
Third, your own cost of operations drops, often by 30% or more. These savings occur because you now can control and stabilize your key customers’ order patterns, enabling you to reduce inventory, shipment frequency, and expedited movements. Importantly, this major saving enables you to keep your prices stable, and still strongly grow your profits.
This leads to a crucial question: Why not do this with all your key accounts?
The problem is that supply chain integration takes time and resources to develop. And, if your customer is a transactional buyer with a weak capability to partner, your costs will blow up and your profits will plunge. This leads many companies to be very hesitant to enter into these relationships at all.
Which customers should you approach for supply chain integration? The answer is clear: your long-term Islands of Profit customers.
Yet, if you can’t identify your Islands of Profit customers, you should rightly fear simply responding positively to any large customer request for supply chain integration – especially since your Coral Reef customers (large and unprofitable) are most often the ones that are most aggressive in pushing for these advanced services with no intention of adequately paying for them.
And if you devote your precious resources to supply chain integration with your Coral Reef customers, you are not only buying a cannon – you are walking into quicksand.
Strategic account management’s ultimate prize
Strategic account managers are vital to a company’s success. When you identify and deftly manage your Islands of Profit accounts, you create fast, powerful growth in both revenues and profits – strategic account management’s ultimate prize.
This is the essence of turbocharged strategic account management.
The critical question for all strategic account managers is: Can you identify, secure, and grow your Islands of Profit Accounts, and laser-target new accounts that belong in this group?
If so, you have an opportunity of a lifetime to build really fast, strong profitable growth.