Jonathan Byrnes and John Wass Help Companies Create Profitable Fortresses Against Competition

By Scott S. Smith | Friday, 16 April 2021 | Feature, Business

You are eager to start your dream business-to-business (B2B) service, but you realize the odds are especially long because enterprises of all sizes are being roiled by a cyclone of change. Among the drivers are artificial intelligence, robotics, consumer buying preferences, demographics, fragmenting markets, global regulations, security threats, digital upstarts, giants intruding into previously safe niches, and supply chain disruptions.

"Many corporate managers became experts in the Age of Mass Markets, when the key performance indicators, like broad-based sales growth and cost reductions, were the way companies succeeded," John Wass, CEO of Profit Isle, told Startup Savant. He is co-author of the new McGraw-Hill book “Choose Your Customer: How to Compete Against the Digital Giants and Thrive” alongside Jonathan Byrnes, chairman of the company. "We began to enter what we call the Age of Diverse Markets a few decades ago, driven by technology, but managers feel they can't concentrate on strategic changes because they are focused on winning tactical battles. They get rewarded on short-term profits and haven't understood they have been losing the long-term profits war, which became much more apparent when the pandemic hit."

After the boom years, corporate dysfunction matters, as reviews from unhappy customers and employees expose the yawning gaps between mission statements and reality on the ground. But without those bad corporate habits, entrepreneurs have an opening for success, and Byrnes and Wass show companies of any size a revolutionary way to succeed, especially in the B2B space.

Wass earned a B.S. in engineering at Princeton in 1983, worked in marketing for Procter & Gamble, M&M, and Fidelity Investments before he was recruited to a new retailer, Staples, in 1986. For the next 11 years, he was part of the management team that grew it from three stores to over 1,000. He developed many of retail's now-standard marketing and supply chain management innovations, such as loyalty cards and links between Asian factories and store shelves. When a two-week labor strike at U.S. ports disrupted a year's worth of supplies, he left to study what had happened in more depth, earning a master's in logistics in 1999 at MIT, where Byrnes was a senior lecturer.

Wass started a company that helped others recycle or properly dispose of used products, but it went under in the 9/11 market crash. In 2006, he co-founded WaveMark, which pioneered radio frequency identification tracking for medical devices and was sold to Cardinal Health in 2011.

He and Byrnes started Profit Isle in 2014, which has helped clients achieve sustained annual profit growth of 10% to 30%. Byrnes was developing profit analytics and management software in the late 1980s, which he used to help consulting clients become more profitable, described in his 2010 book “Islands of Profit in a Sea of Red Ink.”

Focus on Your Most Profitable Customers and Help Reduce Their Costs

The fundamental problem with the common practice of focusing on aggregate revenues and gross margins is that neither reports the true bottom line for each transaction, they wrote. Gross margins do not include sales and marketing costs, operating and supply chain costs, or overhead. Clients of Profit Isle are always shocked to find out that when these and the cost of providing support to their B2B customers (such as for frequent, small orders or to fulfill special shipping requests), most are not profitable.

"For most companies, only 10% to 15% of their customers are very profitable to serve, which we call Profit Peaks, accounting for almost all the net profits," said Wass. "Another 15% to 50% are what we call Profit Drains, which are actually causing significant losses. The final group of 65% to 75%, Profit Deserts, are companies of any size whose purchases are small or do not result in a significant profit or loss. When clients see this breakdown, their impulse is to try to immediately fix the Profit Drains, but many of these are just price shopping and there is no easy solution. It's counterintuitive for many leaders, but the best near-term improvement in profitability comes from developing a closer relationship with the Profit Peaks. They are the most loyal customers, not the complainers, but that has typically resulted in their having been given little attention. If managers concentrate on increasing the sales to Peak customers by 10% to 15% and converting 20% of the Drains to become Peaks, which is very realistic, overall profits are likely to increase by at least 10% to 30%."

The Deserts that cannot be served in a significantly profitable way can have the cost to maintain them reduced, such as limiting the frequency of orders, having them place orders through the website, and eliminating special shipping and handling requests. This is the first step in growing profitability by "choosing customers" to fit into a relationship hierarchy, they wrote.

The key to being able to analyze which category each of the client's customers belongs in is Profit Isle's program that measures all the true costs of each transaction, "an all-in profit-and-loss analysis for each invoice line, which we call a profit stack," they wrote. Then with this information, the client can build a closer relationship with its Peak customers by showing them ways they can save money across their entire operation.

One of Byrnes' earliest, Baxter, a hospital supply company, is described in the book. Among the products they distributed were intravenous solution drip sets and a five-year contract with a hospital, negotiated with a pharmacist, might hinge on whether the price was $1.03 or $1.05. Baxter decided to find out what the full cost was for one hospital by the time it was given to the patient to determine if it could help reduce that. The products flowed through an internal supply chain that was very inefficient so that by the time the IV was administered, the cost (based on labor rates) might reach $7.

Baxter was able to cut in half the internal hospital cost by process improvements, including fewer trips by skilled nurses to get IVs, installing the industry's first vendor-managed inventory system, and limiting shipment verification to just a sample of high-value products to speed getting them on the shelves. As it expanded this system to other customers, Baxter was surprised that its own operating costs dropped 30%, while sales rose 35%. But one of the most important lessons in the Age of Diverse Markets, Wass says, is that there are no cookie-cutter solutions that can be applied to all customers across all market segments.

Becoming a Value Entrepreneur

There is a lot more to creating a dramatically improved relationship with the most profitable B2B customers than simply saving their product and service costs. It starts with getting to know them far beyond what the usual surveys and interviews yield, Byrnes and Wass argue. Large companies can have managers spend a fair amount of time at customer operations initially. Smaller firms should find the most effective ways to get deeper information, from setting up walkthroughs at the facility by their CEO and a key investor to having working meals with a variety of managers. The goal is to become a "value entrepreneur," seeking maximum insights to help the customer become more profitable, while providing other valuable services. Properly treated, Peaks are going to cost more to serve, but the more closely integrated relationships pay their way many times over, and competitors will find it hard to break them.

You can also apply your newfound skills to your most important supply chain members to create win-win cost savings and optimization at every stage - relationships that could be invaluable if there are supply shortages.

Ideally, a multi-capability team works out the goals for the customer, gets buy-in, and implements the process so that it will quickly prove its value across a range of areas, from improving their own customer service to optimizing their website. Small companies could draw on key shareholders and mentors for help. Wass says that while they previously offered their software only to large companies, in 2021, they have started working with consultants who can scale their services to work even with startups.

"In a year or two, we should have a new version of our program that will be affordable for small companies and meantime, entrepreneurs can work with investors and advisors to make sure they build into your DNA a focus on transactional profitability," said Wass. "You can have 1,000 customers and 600 products and track this on a spreadsheet now. If you treat your finance people as part of the strategic team, instead of bean counters, they will create the data you need. Then if you choose the right relationships with your customers, align your practices appropriately for each category, and manage the process to meet their evolving needs, you will build a defensible fortress around your business that even digital giants cannot easily penetrate."

About the Author

Scott S. Smith

Scott S. Smith has had over 2,000 articles and interviews published in nearly 200 media, including Los Angeles Magazine, American Airlines’ American Way, and Investor’s Business Daily. His interview subjects have included Bill Gates, Richard Branson, Meg Whitman, Reed Hastings, Howard Schultz, Larry Ellison, Kathy Ireland, and Quincy Jones.