Top three key performance areas for consumer companies today
With inflation at a 40-year high, and supply chain disruptions a recurring issue, consumer brands around the world are facing challenging times. Now, with rising interest rates, the need to spend wisely, manage cash, and grow profitably is more critical than ever before.
Smart managers are closely monitoring a tight list of key performance areas as part of their monthly reporting tool kit to allow them to prioritize investment of time and capital. Here are three key performance areas consumer companies should monitor:
1) Accurate and timely costing
Whatever is measured will be managed, as the old adage says. In today’s world of inflationary prices, consumer companies must manage actual costs as much as possible. A standard costing system (especially for a business with inputs that are subject to commodity risk) is going to leave substantial risk of catch up, when actual prices are accelerating versus a standard costs, established once a year. Managers must also be diligent in constructing a costing model that reflects the true cost of each top customer, product, or channel.
Growing consumer brands tend to focus on the cost of materials but often neglect to include customer-specific costs buried below costs of goods sold in their profitability analysis. Typical examples of this include outbound freight, third party storage and distribution costs, credit card processing fees, online marketplace fees, channel specific commissions, as well as marketing and promotions costs. If not properly considered, these items can lead to over-stated contribution by customer, product, or channel. Many of these costs are correctly recorded for accounting and financial statement presentation (US GAAP) purposes in selling and operating expenses, and not in cost of goods sold, as they do not relate to the cost to obtain inventory and make it ready for sale. But to understand true profitability by product, customer, or channel, all directly attributable costs should be taken into account. A true contribution margin is particularly vital when it comes to customer pricing discussions, and accurate costing and contribution calculations can add valuable points to their gross margin.
Finally, there is no better time than now to review all customer, sales commission, and vendor contracts, and prepare a summary of key terms and expiration dates. Many brands have begun to prioritize customers and channels based on order volumes and profitability metrics. This can only be done with accurate and timely costing information.
2) Liquidity is king
It’s critical to have a keen focus on managing cash flows and working capital effectively. Many retailers are seeing a slowdown in sell-through in 2022 and rising inventory levels. Therefore, it is essential that growing brands manage their inventory and demand planning, vendor relationships, and cash collections with laser focus.
Inventory management is one of the biggest areas for improvement with growing consumer companies. For many, inventory turns are managed broadly on a quarterly or seasonal basis. This approach often leads to missed opportunities to react quickly to emerging trends. To better manage inventory, monthly reporting metrics that include a detailed inventory aging by SKU or product category can allow management to identify and investigate specific inventory issues, develop strategies to sell off slow moving SKUS, and focus demand planning on faster moving SKUs. This can result in dramatically improved cash flows and improving the timeliness of incoming cash flows is essential. Furthermore, a strong accounts receivable department is worth the investment and using automated tools to send timely invoices and automatic follow-ups, while providing payment options that make it easy for customers to pay, will decrease outstanding receivables and improve cash flows. Many consumer companies are working with third parties that provide buy-now, pay-later options to their customers to improve the timeliness of cash flows.
3) Evaluating customer acquisition and retention costs
For many emerging consumer companies, marketing and advertising is the most significant cost outside of payroll and purchasing. The new pro-consumer privacy measures implemented by Apple with the launch of iOS 14, have brought significant changes to the digital marketing world and transformed advertising campaigns. For those consumer companies relying on the direct-to-consumer channel as their primary source of revenue, it is increasingly challenging to measure ROI on paid marketing spend due to unpredictable customer conversion rates.
As a result, consumer companies are placing greater emphasis on understanding and improving customer retention, as well as focusing on improving metrics including repeat customer rate, purchase frequencies, and average order values. Strategies like customer feedback loops, loyalty programs, and customer education programs can all lead to increased customer retention rates.
Of course, a customer must first be acquired in order to be retained, so the challenge is to balance these strategies and their associated costs. These days, it costs anywhere from 5 to 25 times more to acquire a new customer, than retain an existing one. Using segregated data metrics to understand true costs and benefits can help improve real-time decision making.
Margaret Shanley, Principal, Transactions & Turnaround Advisory
Stephen Wyss, Partner, Assurance
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