Market-Based Profit Improvement Can Increase Profits Without Cutting Costs
Hamilton Consultants White Paper
October 5, 2001

Every company can become more profitable, or grow faster, simply by improving the basic blocking and tackling of sales and marketing (e.g., personal selling, pricing, new product introductions, target marketing, channels management, CRM).

The purpose of Market-Based Profit Improvement (MPI) is to identify and harvest these (often) substantial benefits from sales and marketing optimization without substantial headcount reduction or embarking on a major strategy overhaul.

The MPI process is rooted in the "Marketing Audit" approach which Hamilton Consultants, McKinsey, Arthur D. Little and Booz Allen Hamilton have undertaken with business units for over 40 years, as well as the high dollar impact of pricing and measured marketing (a.k.a. CRM) consulting. MPI embraces the comprehensiveness of coverage of the marketing audit and the quick payback to the bottom line of pricing and CRM approaches to give businesses a clear path to near-term growth and margin improvement.

MPI does not rely on cost cutting, re-engineering or major transformation to achieve results. Too often we see managements of low-profit companies trying to boost profits by cutting costs. The risk of this approach, so well identified by Hamel and Prahalad in Competing for the Future, is that management will "cut muscle" along with the fat.

MPI is also a shorter-term process--as little as three months, and often no more than six to eight months--unlike business transformation processes which sometimes require several years and utilize large amounts of internal resource. MPI is a "quick hit" way to squeeze significant profits from a business just by emphasizing the value-enhancing activities of the core business.

The Market-Based Profit Improvement process involves four simple steps:

1. Determine the areas of untapped value. First, a data-based analysis pinpoints the winners, losers, and also-rans in each of five areas that drive corporate profit.

• Customers
• Product/Service Offerings
• Sales Force Approach
• Channels/Locations
• Marketing Campaigns

This step requires a comprehensive approach to data collection and a rigorous approach to its analysis. Consultants often collect customer information straight from the customers themselves, ride along with the client’s salespeople to assess the selling task, interview management intensively, and dive into the numbers to understand the costs and benefits of the client’s various efforts. From this step, a number of profit and growth opportunities arise.

2. Using the "New Four P’s" of marketing, identify actions which will harvest the untapped value. These actions are:

"Picking," or making educated decisions to pursue, specific markets, customers, channels, campaigns and products that offer growth and profit at low risk. Consultants manage risk by developing new research and financial modeling to be able to interpret results early and make adjustments to marketing investment spending accordingly.

"Pruning" unprofitable product offerings, distribution channels, sales efforts and even customers. Pruning accomplishes two goals: it eliminates value vampires--those efforts that are sapping the strength of a company--and it allows a reallocation of resources to areas which can contribute value.

"Positioning" product and service offerings, using sales messages, collateral material and advertising, to where, within the maze of competitive offerings, the company’s product or service will be located. Such things as relative price, distribution density, features, packaging, and brand image all contribute to a product’s correct positioning.

"Pricing" to maximize profits and attract new customers. While this sounds obvious, setting prices properly requires identifying a customer's price sensitivity, the competitive landscape, and product cost structure. Among the "New Four P’s," pricing is often the strongest lever to short-term profit.

3. Quantify the stakes. Each profit and growth opportunity is then quantified and ranked according to its value creation potential. Tradeoffs and limiting resources are identified and, on the basis of these inputs, Hamilton creates a financial model that calculates the total achievable "stakes" that can be obtained. The results can be surprising. One client was shocked to learn that by implementing only seven relatively easy initiatives, they could increase near-term EBITDA by $16 million on sales of just $900 million.

4. Take action. The last step of the MPI process is the design, and most importantly, the implementation of, the action plan that most efficiently harvests the stakes. Task teams of consultants and client company managers man these efforts. Results are achieved through targeted application of the "New Four P’s" of Action Marketing explained above.

Overal Approach

Over and over we have found that within each point on the MPI star a few efforts/inputs lead to the most results. In other words, the 80/20 rule applies. For example, value-creating results usually come from a few sources:

Based on our experience, we have found that about 20% of the best customers generate 80% of the profit. Similarly, around 18% of the products provide 88% of the total profit. The top quartile of the sales force usually generates almost two thirds of the new customers. In the case of channels/locations and marketing campaign, the top groups always generate disproportional results but in varying degrees. The implications are clear. If it is possible to identify the top performers--not always a simple task--one can take two positive steps: first, nurture the vital few high contributors so they remain loyal; and second, undertake activities to increase the population of high performers.

On the other hand, it is always true that the lowest performing few actually destroy value. The following chart points out an aggregated example where value is destroyed by the lowest performing customers, SKU's, sales people, channels, and marketing campaigns:

The implications for the lowest performers are also clear. Again, if it is possible to identify them--not always an easy task--one can take two positive steps: first, fix the problem--if this can be done--and bring performance up to an acceptable level; or second, prune the activity either directly or through strategic price increases.

Some Examples

Our recent work with clients demonstrates the power of MPI to produce results, but Bain, McKinsey and others could likely demonstrate the same kind of story with their clients.

A consumer durables company in a very competitive industry had little profit, despite a relatively strong market position. MPI focused on products and customers, and secondly on sales force. The team determined small customers were not as profitable as large customers, and so the discount and allowance structure was modified to capture the extra value the company was providing to these small customers. Similarly, the team found some convenience and specialty products could support significantly higher margins given competitive conditions and customer price sensitivity. Finally, using an analysis of sales penetration compared to territory market potential the team identified several sales territories that could be split in two, resulting in more total sales. The upshot was $2 million in additional annual profit (3% of sales) and a growth in sales of 15%.

For a construction products company, an MPI effort uncovered over $15 million of additional EBITDA potential (on sales of $200 million) capturable largely through straightforward growth initiatives. The initial project uncovered the fact that the company was struggling to define regional and local market potential, thus preventing optimum allocation of sales and marketing resources. Efforts were focused on painstaking market sizing efforts with the sales force, the results of which form the basis for allocations of additional sales people and storage depots. Other, lesser sources of new EBITDA potential include re-pricing of peripheral products, elimination of unprofitable customers, and more effective new product introduction efforts.

For an oilfield services company, MPI focused on relaunching a product that had performed well below expectations. A rapid analysis of the causes of these disappointing results uncovered the primary problem: a "one size fits all" message for a diverse customer population. Extensive customer interviews defined the range and variety of customer needs. Based on this data, the team developed region- and service-specific customer value models. These models were translated into actions in the Customer, Sales Force, and Products areas of the MPI star. The customer value models were the basis for a new variable pricing structure featuring gain-sharing options, and led to the development of service bundles to enable premium pricing. These actions were supported by the creation of new, detailed marketing plans and sales tools, coupled with sales training. Over the twelve months following the MPI effort, the relaunched product produced nearly $80 million in profitable incremental sales, despite oil prices that were the lowest, in real terms, in over 30 years.

Implementation of MPI Principles Results in Lasting Benefits

The results described above are not unusual. Almost every company can benefit from taking an MPI approach to critically examining their business. Typical benefits of an MPI analysis include:

Bottom line results:

• Immediate financial results through targeted pricing and pruning
• Long term financial results through picking and positioning
• Optimized sales and marketing efforts that ensure the most bang for the buck

A reinvigorated business:

• Quantifiable and realistic goals that motivate people to achieve them
• Proven stakes that are taken seriously
• Management and employees who feel empowered
• Marketing being treated as everyone's job

An increased feeling of control:

• Management having a clear path going forward
• Employees having confidence in the company's trajectory
• An organized set of tactics that make implementation easier

Results without painful cost cutting and penny-pinching:

• Adding significant money to the bottom line while being top line focused
• Not buying short term results by undercutting the long-term potential of the company
• Focusing resources in areas of highest impact

Top-tier companies attain and maintain market and profit leadership by actively creating and capturing value throughout their entire organizations.

These companies implement the principles of MPI to consistently surpass their competition in terms of growth and profitability.

Companies that choose to implement MPI principles also benefit from the knowledge and skills that their management acquires through their active focus on market opportunities and the increased feeling of control they have over their business.

Hamilton Consultants © 2001