When it comes to company purpose, everyone is long on platitudes: share your mission statement, be clear on your values, create a culture of listening. There’s nothing wrong with these suggestions–in fact, we contributed our own perspective some time ago in these pages. But there’s something missing from most of this advice: the answer to one essential question.
How does a company determine what its purpose is in the first place?
Profit sounds like a good starting point. Every business owner knows that without profit, the company fails to operate. It’s the most constant indicator of whether your business is delivering what customers value. But profit is rarely used as the true starting point. Most companies declare a purpose first, in the hopes that customers find value in it, in the hopes that it then generates profit.
But planning tends to work better than hoping. And there’s a pragmatic approach to defining your company purpose, likely as part of your annual planning process, that we’ve seen play out successfully at several companies we’ve worked with. It follows three specific steps.
Step 1: Make profit the true starting point.
Find out what products, services or customers are currently most profitable. You may think you already know but be intellectually curious–let data and analysis guide you. Often this analysis is as simple as comparing gross margin. Pay close attention; gross margin percentage does not typically allocate various overhead costs like marketing or invoicing. Large customers with a 30% margin may in fact be much more profitable than small customers with 40% margins, all costs considered.
(Note: if you have a particular constraint in your business–say, the capacity of your warehouse–try a new vantage point. One view of relative profitability is your profitability versus that constraint. An HVAC distributor we worked with found that focusing on product profitability, versus return on inventory, gave them a more accurate feel of profitability by customer and by product.)
Step 2: Rank all your customers by profitability.
Compare high profit jobs against low profit jobs, studying the common traits of the jobs that are most profitable. The good news is that your profitable jobs tend to be easy to spot. They’re the ones you’re really good at–the ones you can do better than just about anyone else.
We tried this exercise with a foundry in Oklahoma that was reliably losing a couple million per year. The first thing we noticed: very large, low-volume castings were making a lot more money than any other castings. But why? “Might have something to do with the in-cycle mold change,” one engineer pointed out. He walked me through the mechanics of the cost advantage. There were only three plants in the world that could change tools as rapidly.
“It’s no wonder we make a fortune on these huge, low-volume castings,” he said. “Anyone that doesn’t have an in-cycle mold change can’t compete.” We directed the sales team to go after large, low volume casting work, and they knew why.
The final piece of this step is to reverse the process. Sort jobs by the prevalent traits of the more profitable projects. At the foundry, we happened to find several large-sized, small-volume jobs that weren’t as profitable. We’d simply underpriced them. Customers give feedback when prices are too high by taking their business elsewhere. But when jobs are underpriced, your company doesn’t get any feedback. In this case, correcting the pricing mistake and focusing on profitable jobs meant everything.
Eighteen months later, the foundry was earning a couple million annually, instead of losing it.
Step 3: Talk with your customers.
Sure, you talk with your customers all the time, taking orders and responding to requests. But this is a different conversation. What you want to learn is what they really value. These should be your most profitably customers–the ones driving those high-profit jobs–so what they value effectively defines your profitable purpose.
It’s important to remember that you’re listening, not selling. We suggest using a script to guide these customer interviews. If your employees are paying close attention, they grow closer to the customer and their mindset. Customers feel appreciated and connected to you. They feel heard. Repeat and referral revenue becomes inevitable.
Once you’ve conducted customer interviews, pull your team together to review the insights. Identify common themes. A cement contractor we worked with learned that getting the bid a day in advance was what the customer valued. An engineering company learned it was their scanning technology that enabled them to finish the job more quickly and accurately. At an emergency care clinic, it was shorter wait times.
Now your profitable purpose is defined objectively–and it’s determined by the very thing that drives your value. Share this with your team. Focus your team on addressing these needs, as well as finding new customers with similar needs. Monitor your performance on this purpose. Be sure to keep the conversation going, as customer needs change over time.
And over time, it’s only likely that you’ll become progressively more efficient at addressing this purpose. Serving your customers what they value most is a purpose that will grow your business, grow your company’s value and the job security of your employees. All the more purposeful, and all the more profitable.