I recently unearthed a cover letter from long ago.
“Dear Bob & Karen,” my letter began. “Attached is Copresco’s 2006 QP Top 100 survey form.” Yes, I was addressing the editorial team of Quick Printing magazine.
“You will note that our total sales volume is down, to such a point that we may not make the top 100 rank this year. The reason for this is the implementation of our strategic decision to exit certain market segments that did not contribute sufficiently to profit margins.
“The above corporate doublespeak simply means that we have been working to deliberately rid ourselves of business that doesn’t generate the profit margins we want.
“By giving up our focus on sales (the “top line”) we’re making more money (the “bottom line”)!
“Our realignment of strategic goals would make a worthwhile feature story.” I concluded my missive, “Please let me know if you are interested.”
They weren’t. I never heard back, and without further fanfare Copresco’s decade long run in the Quick Printing Top 100 list came to an end.
Now, editor Karen Hall calls me every month to politely ask for my column, so I get to present the story I wanted to write, just seven years later. Such are the vicissitudes of fate.
Opting for Profit
During the recession that followed the downturn after the 9/11 tragedy, we took a hard look at our company’s financial data. Sales and growth are good, right? We decided that cash and profits are even better, whereas sales growth is good only to the extent that it serves to increase profits.
That reducing sales volume may increase profit margin might seem counterintuitive, but it can work under certain circumstances.
Walking away from business falls into two categories: ending relationships with specific clients, and exiting entire market segments that do not fit into your growth strategy. Our activity was in the latter arena. Be careful with both. It is relatively easy to dump clients, but very hard to regain them!
You cannot perform this exercise without solid cost accounting and job costing. You may be shocked to discover that a nuisance client is actually one of your most profitable, while everyone’s favorite customer is leaking profit from too many special favors provided free of charge.
Conversely, many printers make all of their profit from just one client who unwittingly subsidizes everyone else.
How about that customer with lots of work and a great attitude who insists that he needs rock bottom pricing and sometimes takes 180 days to pay? Do the math. If money costs 5.5 percent annually (it does) and you make three percent profit (quite typical for print), you aren’t making anything from this guy, no matter how nice he is.
Prune the Vine
The decision to part ways with an individual client may be fairly clear cut, but deciding to leave an entire market requires a more nuanced thought process.
For example, are you focused on business printing? If so, then why do you have wedding invitation books in your lobby? Maybe you make money on them (maybe; probably not). But even so, you are expending salary and overhead to focus on something that does not bring you any closer to realizing your strategic objectives. Get rid of ‘em? Only you can make this decision.
What is your capacity utilization? Have you sought out “filler” work at discount prices because you had excess capacity? If a lease is coming to an end and you are thinking of buying new equipment, now is the time to jettison the filler and right-size your equipment profile.
A parting thought. If terms like “cost accounting,” “cost of funds,” and “capacity utilization” are not clear to you, don’t even think about tweaking your customer list. Your next project should be to implement or upgrade your shop management system.