Metrics for Mastering Margins

In my last article, I identified nine levers you can pull for mastering profit margins and I promised you some metrics you can use to indicate success with those levers.

These metrics will paint you a picture of how you are performing in your quest to master margins and increase profitability. The key to any metric is that it must show progress towards the goal you are trying to achieve and the outcomes you are trying to accomplish.

Here are nine metrics for success, with each one corresponding to a margin lever you can pull.

• The “Early Bird Special” – This metric will help you understand how often customers accept early offers or discounts by measuring the percentage of customers who take early offers and discounts. If this happens often, then you can try different pricing scenarios to maximize profits. If it doesn’t happen often, then you need to try something new. The goal is to bring in profitable business sooner.
• Return on risk – This metric will help you maximize the value you get from the assets that you are purchasing or have already purchased. Too many organizations only focus on lowest price instead of focusing on the best value and building the best relationships with key suppliers. This variation on ROI shows that if your organization is willing to take a risk, you need to understand what the expected returns will be from that risk.
• % of margin loss per defect – This metric shows the direct correlation between profit margins and defects or failure work that is done in the organization. It puts a percentage figure on how much profit margin was lost as a result of poor quality (defect, obsolescence, recall, etc.).
• # of supply chain touch points – This metric actually reports on the number of times a product gets “touched” in the supply chain. The fewer times it get touched, the lower the risk, and the higher the margin. Knowing how many times a product is touched allows you to look at each touch point and determine if it adds any value.
• # of referrals per customer – This metric measures how many actual referrals to new customers you are receiving from existing customers. The higher the number, the lower the cost of new business acquisition and the higher your customer retention will be. This takes the NPS score one step further and actually tracks referrals.
• Strategic employee retention – Most employee turnover metrics measure the percentage of turnover for the entire organization. This metric measures retention for employees who have been flagged as key to the organization’s success. These would be key leaders, future leaders and others who hold or will hold important positions in the company. This metric will tell you if you are able to retain your top people at a higher rate than the rest of the organization. You should be at 99% or better in strategic retention.
• Average time of new customer acquisition – As more customers come to you as a result of your brand recognition, it will become faster and cheaper to acquire them. This metric shows the average time from first contact with a prospective customer to the time they actually buy something from you. This number should get shorter over time.
• % of daily tactics aligned with strategy – This metric shows how aligned the front lines of your organization are with the organization’s overall strategy and direction. The percentage should be high because what your people do on a daily basis should align with the progress your organization is trying to make. A good benchmark is 90%.
• % of revenue from new products and services – This metric shows you how much of your profitability is coming from new products and services. I would define new as anything that has been developed in the past three years. This should increase over time and be at least 25% in any given year for most organizations.

These metrics tie directly back to how you can master profit margins in your organization and signify a big shift in your mindset. As I cover in my book, Redefining Operational Excellence, excellence is a mindset, not a methodology. If you want to be successful you need to rethink what success looks like and how to get there.

Look for my next article which will provide you with a self-assessment tool to determine which profit levers would provide your organization with the most benefit and opportunity.