#245: Understanding the Customer Profitability Curve: Focus on the Right Clients to Grow Enterprise Value
Do you know how much money you are wasting on inefficiencies inside your customer base? On today’s show, we’re learning all about the Customer Profitability Framework and what you can do—today—to make a real impact on your bottom line while also increasing the value of your business. If you don’t understand your customer profit curve or how to reduce your margin leakage, we’ve got the show for you today. Our guest is David Aasen—the customer profitability master—who has been the CFO of multiple private businesses, as well as private equity firms. Learn from specific case examples like the table story, which explains how 20% of our customers drive more than 150% of our profits, and the discount story, where David walks us through the real impact of 'harmless' customer discounts. This episode is a bit more on the tactical side, but the real-world examples drive the essential points home so anyone from a C-suite exec to a three-time founder will appreciate how these metrics impact your bottom line.
What You Will Learn In Today's Podcast Interview
- How to drive profitable growth and reduce margin leakage
- What the Customer Profitability Framework is and why you should be using it
- You can think customer are profitable that are actually costing you money
- How customer profitability can be as much as 3x off what the owner thinks
- Inefficient processes are like an anchor holding your ship back
- Why you should rethink how you’re assigning costs
- Who you should be giving discounts and price concessions to versus the ROI on those price discounts
- How to find where your margin is leaking
- The importance of getting real data to understand your efficiencies and risks
- Why you should track the time of anyone who has impact on clients or customers
- What business owners can learn from lawyers when it comes to charging clients
- The power of context to bring an idea into focus
- Why lower customer complexity has real dollar value for your company
- Averages are misleading and you need to be calibrating for each client for success
Are You Growing The Value of Your Business
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- Are your company's current initiatives intentionally designed to increase the value of the business?
- Do you know what you want from your business long term and why?
- Do you know what your company is worth?
- Do you know the differences between Management, Family Transitions, PE Firms, ESOPs and Strategic Buyers?
- Does the business have a written strategic plan on how to achieve the desired normalized EBITDA and valuation?
About the Guest:
David Aasen – the customer profitability master – has been a CFO of multiple private businesses as well as Private Equity firms. At 23, David was hired as a CFO for a $50 million global company. That experience shaped the trajectory of his career. He went from guessing what to do to developing exceptional technical skills and a stellar, well-stocked tool kit of operational finance best practices (top 10%) that demonstrates a mastery of his craft.
David speaks the language of owners and value creation. His Customer Profitability Framework is well-known for helping owners find inefficiencies in services and costs of their customers. Under his financial leadership, Northern Metal increased revenue 2X and EBITDA 3X in 7 years; Norcraft increased revenue 3X and EBITDA 4X in 5 years.
05:45 - “What are the biggest opportunities to drive profitable growth and my expression of reducing margin leakage.” – David Aasen
06:45 - “Think of a business as a portfolio of it’s customers. It’s really that simple.” – David Aasen
11:23 - “The top 20% could be driving 150-200% of the company’s EBITDA.” – David Aasen
13:22 - “That is how I define complexity, is by profit variation by customer.” – David Aasen
15:00 - “For complex businesses, averages are misleading.” – David Aasen
18:02 - “If they haven’t looked at these items before, their initial gains are typically much larger because it’s like an anchor. They’re dragging it and they don’t really know it. They haven’t really looked at quality before” – David Aasen
18:30 - “They didn’t even know how much free stuff they were giving away.” – David Aasen
21:51 - “Your listeners are leaving a lot of money on the table. And so this approach helps them to know who winning and losing customers are and where margins are leaking.” – David Aasen
24:27 - “Get an ROI on price discounts. You want to give them to those customers that are most profitable. Certainly not to the customers who are unprofitable.” – David Aasen
25:52 - “That’s the holy grail of metrics – measuring EBITDA percentage by customer. When you have that, that really is (what I consider to be) the best barometer as to how we’re doing, from a customer’s standpoint.” – David Aasen
26:58 - “We’re not aiming to be precise here, we just want to be directionally correct.” – David Aasen
31:30 - “The 70% in the middle don’t matter.” – David Aasen
46:38 - “They increased their hit rate from 17% to 33% just by being smarter, by calibrating certain things.” – David Aasen
49:44 - “Now we just need a common definition of success. That’s what this is all about.” – David Aasen
53:10 - “If you want to buy business, you go through this process and you say ‘where do we think it will be at the front end for EBITDA percentage, loss or gain, and what can we do to manage that differently?’” – David Aasen
61:55 - “The most profitable customers are typically going to have the best metrics.” – David Aasen
64:01 - “It’s not always what you see, it’s what’s missing.” – David Aasen
64:28 - “Look at data that’s missing, not just what’s in front of you.” – David Aasen
Links and Resources:
Reach out to me if you have questions about the boot camp!
Brought to you by Ryan Tansom of Intentional Growth