The Top Three Performance Areas for Consumer Companies Today
Managing and accurately reporting these metrics helps prioritize investment and increase capital
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 cost that is 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 contributions by customer, product or channel. Many of these costs are correctly recorded for accounting and financial statement presentation (U.S. 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. 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 is 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 a missed opportunity 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 five 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. Developing performance metrics and assessing them in real time
There are many challenges facing growing consumer companies these days, including maintaining gross margins in the face of soaring wage costs and input costs are top of the list. Consumer companies that cannot mitigate increasing costs by adjusting sales strategies and pricing on a timely basis will undoubtedly see a decline in gross margin and, ultimately, cashflow. Prioritizing profitable products, customers and channels, optimizing liquidity and investing in marketing strategies that provide the greatest return on acquiring and retaining customers are essential to the success of consumer companies today. Understanding the underlying data, developing accurate performance metrics and evaluating them on a timely basis are critical tools to help consumer companies achieve that success.