Is Your Business a Holy Ride Yourself to Know?

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Bring meaning and purpose to your business

A business moves from simply surviving to thriving by way of a relentless focus on adding value to the lives of its customers. Peter Drucker had it right: “The purpose of business is to create and keep a customer.” Take care then in choosing your customers. Take care then in choosing what value you want to add. To thrive, you must add value in a way that is truly better if not unique in important aspects.

Richard Koch’s The Star Principle is a smart book with an excellent recipe for creating a Star business. He delivers a seven step blueprint to create a market leader in a fast growing market niche. Along the way, he provides 32 triggers you can apply to your star business building efforts. As he says, some stars are born and some are made.

Peter Thiel writes in Zero to One of creating a star on steroids, so to speak: a monopoly in a market which heretofore had not existed. Going from zero to one is not an everyday event. Creating a something where heretofore nothing existed, is a rare event. Is has become fashionable to speak of unicorns. These are unicorns.

While not as rare as unicorns, star businesses too are rare. Very likely, your existing business is not a unicorn. Can it at least be remade into a star? If you can’t see how to do so, do you give up and go – where? What if you are at the end, with your exit in sight, but it seems so far off because — the numbers just don’t add up to a sufficient pay-out?

If then, I suggest that you return to the beginning. Return to the meaning you bring to your work, to your business. It just might be the spark of fire that differentiates your business from competitors. And, in the eyes of your loyal customers, this spark is what keeps them coming back to you and you don’t even yet realize it.

Here, then, are a few exercises to try for yourself. There are eight of them, and these have internal and external aspects. By internal, I mean that they are intended to focus you inward and upward as preparation for going outward. By external, I mean more concrete questions dealing with who the clients are and who the best clients may be as well as what the services are and what the best services may be. Those questions really set the stage for the analysis, a synthesis if you will, seeking areas of best fit, congruity, alignment and their opposites.

One last thing before you go forward. Please do the following, if only to measure your own sense of progress. Just jot down your immediate response to two sets of questions:

Which customer and / or service generates the most sales? How about gross profits? Net profits? Which ones are costing you money?
With which customer and / or service do you spend most of your time and energy? With which do you most enjoy working and / or providing? Which would you rather retire?

Okay, ready to begin?

1. Inward

Sketch a vision or mission. This is your purpose. What your life means. Obviously deep and personal, this is for your eyes only. Or, for you to share only with those closest to you. Some shy away from this step, saying that it is too personal, too far removed from their business. That reluctance is in part measure of its importance. Do not neglect this very important step. I imagine that you have undertaken it in some manner or form at least once or perhaps on a recurring basis. I simply ask you have the gist of it in mind, to be mindful of it as you move forward.

2. Upward

Based on your life’s purpose, what is the purpose of the business? What does it mean to you? We know that a for-profit business exists to – wait for it – generate profits, to generate free cash. However, we know also that cash is simply a medium of exchange. Cash is a brilliant, spontaneously created device to eliminate the need to wash the farmer’s clothes in exchange for wheat, or to paint the landlord’s house in exchange for shelter, and so on. Cash, in its purest form, simply represents value obtained and the acceptance of a promise to receive value in exchange at some later point. We can provide any value we choose to any number of people, here to include businesses and other complex, hierarchical organizations that we choose. You’ve chosen to provide the value that you deliver to the organizations that you chose. True, some minimal level of value must be given and received to provide food, shelter, safety, and so on. So, the purpose of the business optimally serves your primary purpose. It should serve that purpose in some way. It answers the question why. This too is personal stuff. I urge you not to skip this step. I simply ask you to have the gist of it in mind and to be mindful of it as you move forward.

3. Outward

What is the public facing mission of your business? Optimally, I think, this is aligned with your purpose and the purpose of the business. This may or may not explicitly address the question of why but it must answer what, who and perhaps how. It is very similar to a market position statement but it doesn’t need to be “marketing slick” -worthy, so to speak. It’s not “branding” – this precedes and underpins such branding exercises.

4. Customer Segmentation

For analytical types like me this is fun. If you have a technical background, you may think so too. Customer segmentation starts with a list of your customers. Ideally, you will get this from your accounting / billing / sales management system. Alternatively, you should have some contact management system or CRM. If you can’t scrape together a list of customers, one way or another, if you do not have a contact manager, if you don’t have an accounting system – then, well, you’re reading the wrong article!

Still with me? Good! Take your list of customers and copy/paste it into Column A of your favorite spreadsheet tool. Rename this tab Customers. You can order these alphabetically or any other way that makes most sense. If you have financial data such as total sales amount, gross profit amount, gross margin percentage or any additional values in the list that you’re working from, feel free to sort it by any of these. Personally, I prefer to sort by gross profit amount. I want to focus first and foremost on the customers that appear to be generating the most profit.

However, do not be concerned about getting this summary financial data if it is not readily available. Later on, you’ll be working with your detailed financial transactions. More about that on down below!

There are many ways to segment customers and many lists available to choose from to get started. One very good resource is KnowThis (see below). Their list contains over 45 different segmentation variables. I have added to that a bit to build a matrix for my business customers. You can start with theirs or your favorite list if you already have one in use.

Whichever list you work from, simply look at the attributes and pick out the eight that seem to have the most relevance to your client base and that differentiate your customer base. For instance, you wouldn’t pick business versus consumer if all your customers are businesses. You would though select attributes from within the business section of the list. For each attribute, use a level of analysis that differentiates your customers into at least three groups. For example, you wouldn’t select State as your geographic unit of analysis if all of your customers are in, say, California. On the other hand, its okay to use State if you have customers in most or all of the 50 states. (I’m using US examples but the same principle applies to any country.)

Also, say business size is an important distinction for you. Depending on what aspect of size is important, you might use actual, say, sales dollars, or employee count, or some such countable number. Or, you could simply group the customers into three to eight groups within that attribute: e.g., small, or medium and large, or, 1st through 8th, or A through H, etc.

If most of the segmentation attributes do not seem relevant, that’s fine. It is actually better to weed out all but the most important. In fact, the 80/20 Rule tells us that just eight or nine of these attributes will be important to you and, of these, one or two will be the most critically important. So, focus and pick the eight that somehow differentiate the clients. If you are having trouble getting to eight, include one from each stage (assuming you are using the KnowThis schema). Also, think about the “buyer” or “decision-maker” – that person’s role in the organization, demeanor, style, etc. – as an attribute distinct from, say, the customer organization’s culture. Buyer roles could vary by title or functional role in the organization. The customer organizational cultures may vary from hierarchical or bureaucratic to entrepreneurial.

Just think about your business. If your organizational structure somehow reflects some customer attribute, then by all means include these attributes. For instance, if your operational and / or selling departments reflect customer territories, however you define these, then include customer territories as one of your attributes. Even if your internal cost structure doesn’t track the actual costs, include this or these attributes.

If your intuition tells you that you have better and worse customers, and some tend to be big or small, fast or slow, entrepreneurial or bureaucratic, young or old, etc., then your intuition is telling you something important. Whatever these instinctive differentiators are – even and especially the soft, squishy, instinctive differentiators – then include them somewhere among your final eight list of segmentation attributes.

Got eight? Great! Enter the name, description or your shorthand for each attribute as a column header in your spreadsheet. If your customers are in Column A and your column header is in Row 1, you would enter your first attribute header in cell (Row 1, Column B) and so until (Row 1, Column I). (If your customer list contains some sort of short code that uniquely identifies the customer as well as the customer name and any other columns, simply begin entering your attribute headers in the very first column available and continue adding them, moving to the right as you go.) Simple, right? Don’t make this too hard for yourself but if your intuition is telling you that one attribute is more important than another, go ahead and order the attribute columns accordingly, most important to least. Upon analysis, you may come to a radically different sense of each attribute’s importance. But, it’s okay to order things in the way that makes sense to you at this point in time.

At this point, you have your list of customers, including any important summary financial data you may have available, and your eight most important differentiating attributes for your customers. You’re ready for some fun – hopefully, some revealing fun. Starting with the topmost customer and leftmost attribute, begin filling in values. It is possible, likely even, that at least a few of the attributes are already pre-populated from your original customer list. Your list may have some sort of geographic data, such as State or Zip, or some sort of commercial classification data, such as Industry schemes like SIC or NAICS, or even some measure of company size, etc. Unless you’ve been through a similar exercise in the past, your data is probably lacking softer attributes, such as company culture, buyer role, and other purchasing conditions or psychographics. Whatever the specifics of your case, take your time but don’t agonize over unknowns or missing data points. Complete what you can. Finish filling out the matrix, even if, at least in the case of minor clients, the answer is some form of Other, IDK, TBD or N/A. As you do so, I think, your intuition will start to join in and provide useful advice, perhaps even reinforcing or calling into question your immediate responses at the outset.

5. Item Segmentation

Whether your company sells services, products or both, you will go through an exercise parallel to customer segmentation. Just as with customer segmentation, you begin here with a list of the products and services that you sell. Again, ideally, you will get this list of product and service items from your accounting / billing / resource planning system. Copy/paste this data to a new tab in your spreadsheet. Rename this tab Items. You will almost certainly have a few attributes already in your list or in your mind: product / service, a unique short code identifier, brand (if you sell multiple brands), make / buy, unit cost, standard selling price / price point, total sales amount, net profit amount, target market, primary vendor (as applicable), any product classes or types that you may use now, etc.

As above, sort this list however you feel is most useful, alphabetically or by some other set of measures. I prefer to sort by total net profit amount. As above, I want to focus first and foremost on the items that appear to be generating the most profit. Again, if you don’t have that level of detail in your master list, then just sort it by what makes the most sense. You want the items that seem the most important to you at the top.

As above, if your organizational structure reflects one or more dimension of item attributes, include these attributes in your analysis. For example, if your selling organization is divided into branded and private label forces, include that dimension.

I do not have a finite, ready list of prospective segmentation attributes for you as a generic list would be, for practical purposes, without end. Your choice of segmentation factors is very much particular to your situation. I can help you if you’re really stuck but if the suggestions above make sense, use whichever of them make sense to you. Here are a few more: primary benefit, unique selling proposition, brand position, customer context (product recall, product launch, product sunset, etc.), (for services) on-site versus remote, etc.

As with customer segmentation, choose the eight that seem most appropriate and useful for differentiating your business in terms of sales, gross profits and net profits. As above, after however many columns you have in your initial product list, create an additional column for each of the eight attributes. As above, if your intuition has started to rank these in some sort of order of importance, use that ranking to order your columns. The analysis discussed below will shed light on your assumptions.

Next, starting at the topmost item and leftmost attribute, begin to fill in the matrix. If some of the columns have been prefilled since they came with your initial list, that’s fine. Simply complete the matrix for the attributes you’ve added.

One note though. You very well may have dozens of columns of data that you got from your system. Most of these, remember the 80/20 Rule, are irrelevant. Do not be tempted to pick the eight most frequently used attributes just to consider this task complete. Really think about my suggestions above and, more importantly, the ideas that have come to you since reading my suggestions. What of these are truly important? What of these are Eight-worthy? Take the extra time. Do the important, valuable thinking on your own to determine the most important eight attributes. Put them on your list and build out your matrix accordingly.

6. Data

Now, you are going to add transactional data from your accounting / billing / resource planning system. You must have invoice and even invoice detail reports that you can export or copy/paste into a new spreadsheet tab. At a minimum, your data must uniquely identify each transaction, each customer and each product or service. Different systems use different language but these elements are typically called the invoice or transaction number, the customer ID and the item ID. You must also have a transaction date. Your system may call this the invoice date. To complete the transaction, you must have at least the sales amount for the item sold. Optimally, the transaction will identify the unit selling price, the units sold as well as the total or extended amount. Optimally, the transaction also has direct cost data: the per unit cost and extended cost. You may have sales tax amounts in your data as well. While tax data is important in its own right, and could be useful depending on whether and how you reconcile your analysis your to various accounts in your general ledger, for our immediate purposes, you needn’t be concerned with sales tax.

Once you have complete and accurate data from your system in your spreadsheet, if this data doesn’t include gross profit already calculated, you can create a gross profit column by adding a formula (Extended Sales Amount less Extended Cost) by whatever names you have given those in your data.

A more difficult – and more important – calculation is net profit. If this is your first go around with this type of analysis, you might want to skip this for now or get some help. Essentially though, you know that you have indirect costs that, by definition, cannot be directly assigned to a particular sale. However, you also know that there are indirect costs that you can assign to different parts of your business, be that part a particular customer or class of customers, or a particular item or class of items. In order to determine whether a particular customer or item is more or less profitable (or even creating a dead-weight loss), you need to assign or allocate these indirect costs by some method. The simplest and least useful way to do that is to simply take your operating costs for your entire business and determine what those are as a percentage of sales (or of direct costs). Whatever that percentage comes out to be, create a new column with that percentage. And, next to it, create a calculation that multiplies it with either the extended sales amount or the extended cost, depending on how you arrived at this percentage. This simply provides a gross, high-level, one-size-fits-all allocation of overhead burden to each transaction.

(Note: There are much better and useful ways to derive and apply this overhead allocation methodology. These are complicated and highly dependent upon specific business situations. As such, I’ll give this topic its due another time.)

To these columns of data, you’ll create 16 columns using a series vLookup formulas that reference the eight customer attributes and the eight item attributes. If you are unfamiliar with the term , there are a wealth of tutorials on the Internet. Or, ask someone you know for help.

Conceptually, syntax aside, each vLookup will look up either the customer or item listed in each transaction and return the customer or item attribute requested from the appropriate tab. If this sounds a bit complicated, don’t give up. Your intuition may be saying one thing and your heart another. Either way, you need something like real data to validate matters. And tagging your transactional data with these attributes is a key step. So, if needed, get some help. In this day and age, there are plenty of people around you that know spreadsheets and are willing to help you. If you prefer, I can help.

7. Analysis

Let us step back out of the spreadsheet details for a moment.

Imagine that you have ten customers and sell one item. The 80/20 Rule says that ±80% of your net profit is generated from 20% – two – of these customers.

Imagine now that you have ten items that you sell to these same ten customers. The 80/20 Rule says that ±80% of your net profit is generated from 20% – two – of these items.

In our imaginary business, ±64% of the net profit would be generated by sales of the top two items to the top two customers.

If so, then why bother selling anything else to anyone else? The answer that most often comes back is that the rest of the customers and items contribute at least something to net profit.

In our simple, imaginary business that very well may true. Its very simplicity would enable you to keep a close eye exactly on where every expenditure goes and why. Thus, you would know if a customer or item was not contributing to the bottom line.

Let us make our example more realistic.

Imagine that for each of the eight customer attributes you have identified, you have a set of three corresponding values, the functional equivalent of {small, medium, large}, {good, better, best}, {slow, moderate, fast}, {rural, suburban, urban}, {commercial, industrial, residential}, {baby boomer, Gen X, Millennial}, {entrepreneurial, bureaucratic, authoritarian} and {growth, trouble, even-keel}. Three to the eighth power says that you would have 6,561 potentially unique sets of customer attributes for comparative analysis. Our 80/20 intuition says that only 1,312 cells would hold any non-zero data. And, of these, about ±53 of the cells – sets of customer attributes – would hold ±64% of the non-zero data.

Imagine also that you sell many products and services. Imagine that you have 13 service categories. Imagine that you buy things you resale, assemble and install things as well as simply provide services. Imagine that you have eight different price schedules. Imagine that you either own or represent five different brands. Imagine three more ways that you can differentiate items just one way or another. In these imaginings, you would have 15,360 potentially unique sets of item attributes for comparative analysis. Again, our 80/20 intuition says that only 3,072 cells hold any non-zero data. And, of these ±122 buckets hold ±64% of the non-zero data.

The product of just the meaningful number of customer and item cells, 53 and 122, respectively, comes to 6,466 combinations. If we take just 20% of that, we are still left with 1,293 cells with a meaningful non-zero number in it.

I have used the term non-zero data for a reason: not all non-zero numbers are positive.

I selected net profit as the unit of analysis rather than sales or even gross profit to illustrate a serious matter, the relevancy of which only you with your data can determine.

As a business becomes more complex, the likelihood that some segment of it is actually losing money increases.

In other words: as your business became more complex, the likelihood that some segment has lost you money increased.

The more complex, the more likely the loss.

You may write this loss off as an investment in a new customer market or product offering and that may be true. And, it may have been true at one time but accumulative losses through the years may never be recouped. It may be time to cut your losses and reinvest your profits into better positioned segments of your business.

The danger in doing this analysis with sales data is that this focuses you on top-line, gross activity rather than bottom-line profits. While performing the analysis with gross profit data does give you a better feel, it doesn’t reach clusters of overhead expense that is not truly general.

For example, you may have your selling expense below the line for historical purposes or simply because it is too cumbersome to allocate selling expense equitably above the line in your Income Statement. The difficulty of doing so is an understandable reason for not restructuring your Income Statement. Still, that doesn’t change the fact that the expense is truly tied to one part of your business rather than another.

This brings us back to the allocation issue noted above. As you no doubt appreciate, the complexity involved really requires a detailed case in which to illustrate. By its nature, such a detailed case would not be applicable to every business. So, again, we must leave this topic here.

With the foregoing in mind, though, we can return to the spreadsheet. Just how do you get your transactional data into these very many cells?

If you have ever worked with pivot tables, you already knew the answer. If you are unfamiliar with pivot tables, there are a wealth of resources on the Internet that can show you how to create these using your favorite spreadsheet application, from free videos to fee-based, one-on-one remote learning sessions with an experienced analyst.

The essence of the analysis is simple. You will create a series of pivot tables that summarize the financial data in the data tab of your spreadsheet. Preferably, as noted above, you will focus your analysis on net profit. If you cannot get those calculations, use gross profit. If you simply want to get started and get comfortable with the process before getting profit data into your sheet, then start with sales amounts.

If you are new to pivot tables, by creating your first one you should see that you are creating a set of rows and columns using the customer and item attributes you chose earlier. You can create multiple tables using any combination of these attributes. You are not bound to use, say, customer attributes for rows and item attributes for columns. Feel free to mix and match. You should notice that you can copy a pivot table and use the copy as the basis of a new table. This is handy if you’re taking the time to format the table as the formatting comes along in the new copy. This is also handy as you dig deeper into your data.

You will most likely start where the light is better, so to speak. That is, you will start with attributes that are most familiar to you from prior analyses. These will probably include any sort of groups, classes and categories that you exported from your financial system. That’s fine. Get comfortable. However, let your intuition work. Add new dimensions to familiar ones and see what you notice. What you’re looking for, ultimately, are pivot tables that neatly separate your net profit into high, medium, low and negative cells.

If you are not handy with spreadsheets, I created a template that you can use to get started. If you want access to a copy, just ask.

8. Findings and Decisions

At the proverbial end of the day, you will have identified the critical few areas – customer and item attributes – where you are generating most and / or highest profits (these may not be the same areas). 80/20 says you will also have found one painful, expense area that is costing you money. The simple next step is to cut your losses and organize your business around these areas of high profitability.

This brings us back to the beginning. Remember those questions I asked you to answer at the outset? How did you do? Are the areas of highest profitability aligned with our meaning and purpose? If so, the next steps truly are simple and now you have data to support your decisions.

If not though, you have some inner work to do and some work to do on your business. Re-examine your meaning and purpose. Perhaps you glossed over these steps previously. If so, have another look. Can the areas of your business that mean most to you be salvaged? Perhaps you simply need to get rid of the dead-weight losses and that will give you the time and energy to devote to these areas.

These are complex questions and serious discussions to have with those closest to you. If you would like my help, just ask.

Good luck and parting words I’ll leave to Warren Zevon :

We left Constantinople in a thousand ninety-nine
To restore the one True Cross that was in this heart of mine
To bring it to Jerusalem and then sail home to Rhodes
We took that holy ride ourselves to know
We took that holy ride ourselves to know

Everyone got famous, everyone got rich
Everyone went off the rails and ended in the ditch
But we had to take that long, hard road to see where it would go
We took that holy ride ourselves to know
We took that holy ride ourselves to know

Now if you make a pilgrimage I hope you find your grail
Be loyal to the ones you leave with even if you fail
Be chivalrous to strangers you meet along the road
As you take that holy ride yourselves to know
You take that holy ride yourselves to know