Afloat, not aground: Helping leaders navigate toward profitability in volatile markets
By Mitch Lee, profit evangelist at Vendavo
When the Ever Given, that now-infamous container ship, ran aground recently, it created a huge bottleneck in global trade, with implications far beyond the Suez Canal. It also brought a question to mind: How do you run a massive ship aground when your job is to basically steer a straight line?
There have been a good many theories on how that happened, but for modern business leaders, what’s the real takeaway? As we’ve seen over the past year, one law that applies to commerce and economics, same as it does everywhere else, is Murphy’s Law: In the case of the Ever Given, anything that could go wrong did go wrong, creating yet another unanticipated global disruption.
Every CEO and CFO is now aware of it: There’s no escaping volatility in the modern marketplace. Fluctuations, changes, and traumas are the new norm, and no industry is safe. Each day, there are shifting currents and sudden winds that may blow your seemingly safe ship of commerce off course.
As captain of that ship, you’ve got to keep a weather eye on the market to steer it safely through disruptions. So, if you’ll pardon a few more nautical analogies, here are some best practices for navigating those dangers so you can sustain long-term profit amidst ever-changing conditions.
Pack a compass and charts
Sailors have set to sea using a compass to be sure they’re headed in the right direction and consulting the most accurate charts available. In dynamic markets, as a CEO, CFO, or leader of a pricing team, you need to orient yourself: Where are you going and what’s your plan for getting there? How do you create a pricing plan when the market will undoubtedly change?
In mapping out a pricing strategy, tune it to your organization and industry. A simple tool to help in identifying what’s right for you is the price waterfall. It lets you frame your strategy from broad to specific terms and identify opportunities for improvement.
Start with your list price, then analyze each step you take in determining the final price that reaches your customer. Each step impacts your profitability, so keep your broad strategy in mind when altering these specific, actionable tactics.
Set benchmarks by comparing price waterfalls month-to-month. This way, you can see which tactics influenced your profitability. If you’re effectively using accurate historical data, you’ll probably never feel you’re venturing into uncharted waters.
Take noon reports
You've set off in the right direction, but then a storm struck (maybe one as big as all of 2020), and you’re off course. Where do you stand now?
Navigators once used sextants to find their location by checking the midday sun in what they called the noon report. Your most positioning tool? The causality chart, which focuses on price, volume, and mix, the combination of which gives high-level insight into the causes of your organization’s revenue. You’ll need more granularity to understand the root causes of profit fluctuations, so add cost and foreign exchange rates to get an in-depth look at pocket margins. Now profitability at a transactional level is much simpler to spy out.
By analyzing each month side-by-side, you’ll see which tactics work and which aren’t meeting expectations. Build the causality report into your routine and match its cadence to your organization’s reporting schedules. It gets much easier to address negative movement when you—and the enterprise—are working from a standardized report.
Deploy your sonar
Maybe the captain of the Ever Given wasn’t paying attention to his sonar screen, which would have revealed the underwater terrain and obstacles in the way. In monitoring your corporate performance, it’s critical to see below the surface to know what’s coming so you can be proactive, not reactive, in your decision-making.
Your equivalent of sonar? Automating pricing software that looks at profitability in multiple dimensions to reveal how your tactics are performing. Let’s say your margins are declining at a steady pace: Using this solution, you’ll be able to quickly scan the revenue, margin percentage, and pocket margin dollars of your customer base. If something is draining your overall margin and it isn’t blatantly due to “surface” markers like external factors or new strategies, you’ll uncover it here.
For instance: Your lowest customer, Customer A, has a margin percentage of 10.3%, while Customer B has a margin percentage of 11.5%. Instinct says start at the bottom—Customer A—and work up.
Yet Customer A has a pocket margin dollar amount of $1.32M, while Customer B is at $10.5M, a much larger account with a sizable influence on your overall margins. Solve the issue with the bigger potential for damage.
Install an alarm panel
Every shipboard adventure movie seems to have a scene where alarms go off. Whether the crew responds with calm professionalism or starts running for the lifeboats? That’s up to the captain. But enterprises need a similar warning system, an alarm panel detailing what’s wrong right now, which problems need attention first, and even indicating who can solve the problem.
Take Customer A and B from above. You already know movement by Customer B is more influential to your margins than Customer A. What next? What kind of behavior indicates a customer is putting your business performance at risk?
Is Customer B purchasing less, lowering the absolute revenue of that account? Has their purchase frequency declined? Maybe they’re purchasing fewer unique SKUs?
Your Customer Retention Alarm Panel should be automated, on duty 24/7, and set up to help you spot any issues early so you can avoid the costly loss of an existing account. You’ll need a quick triage process to respond to an alarm, so the right stakeholders can be alerted and given the right information to address the problem before a “yellow” alert flips to “red.”
Always check the weather
It’s easier for airline pilots: They only need to know the weather a day or two in advance. For our ship of commerce? It’s trickier, because global enterprises don’t change course with ease. It’s an enormous challenge that requires something blithely ignored by market fluctuations: time.
Your business weather report will use internal and external data to forecast market trends. The external data is especially important, since it can provide supplemental or contradictory insight into the truthfulness of the trends your internal data may project.
Everything around you will be shifting, so it's up to you to define your value by adapting your price. Automated price optimization helps define your customer’s willingness to pay (how they value your products and services) at any given moment. Your prices should follow the market, but also incorporate customer-specific insights to ensure any changes are precisely gauged to that account.
Your last step is to leverage ad hoc reports from the field. Your sales team is in the proverbial crow’s nest, monitoring each account from their unique perspective. So incorporate their input to fine-tune your insights to the needs of your business, customers and market.
