Customer & Product Profitability

Most companies do not know where they really make money. Our Square Root Costing service quickly identifies true product and customer profitability, a critical foundation for business improvement.

Don’t fly blind!

Without a clear understanding of where you’re truly making money, you’re flying blind. You’re likely making decisions on a range of factors without understanding the profit impact. This includes pricing, promotions, product development, marketing, operations, portfolio optimization, and overall resource allocation. Yet most companies do not know where they make money. Standard costs do not tell the true story. In today’s complex businesses, massive cross-subsidizations mask the true cost and profit of products, customers, market segments, and activities.

  • Most companies don’t have a clear view of where they make money
  • This leads to poor decision making that negatively impacts profitable growth
  • The situation is getting worse—more complexity means greater levels of cross-subsidization
  • Previous costing approaches were cumbersome and resource-intensive

Square Root Costing: A powerful new approach

Square Root Costing, or SRC, is a powerful approach innovated to address the lack of practical alternatives for companies committed to understanding their costs. Companies typically treat costs as either fixed or variable. However, a significant and growing portion of costs fall into a third category—Complexity Costs. These are costs that are driven by variety, such as SGA, working capital, and manufacturing overhead.

Fifty years ago, this cost category was a relatively small proportion of overall costs—today it is significant. SRC recognizes that, all else equal, complexity costs tend to follow a square root of volume relationship, meaning that the cost is proportional to the square root of the volume. This insight, embedded in our service, means that companies now have the means to quickly diagnose where they are a creating, or destroying, value.

Customer & Product Profitability (CPP1)

How companies use Square Root Costing

SRC is the means to rapidly understand your business at the Operating Profit or Economic Profit level, whether by product, by customer, by region or some other category. Our clients have used it in an array of strategic purposes, such as:

  1. To gain a much clearer picture of true SKU profitability
  2. As part of a SKU optimization or rationalization effort
  3. To develop business rules for product management
  4. To identify pricing and margin improvement opportunities
  5. To inform strategic decisions (markets, segments)
  6. To assess merger synergies and understand true scale benefits
  7. To better align Sales & Marketing with Manufacturing and Supply Chain
Operating Margin Graph

Uncover True Profit Concentration with Whale Curves

Companies typically treat costs as either fixed or variable, but a significant and growing portion of costs fall into a third category—complexity costs—driven by variety and not reflected in standard costs. Using WP&C's complexity costing approach and plotting profitability via whale curves uncovers true customer and product profitability, enabling you to build better strategies to address product mix, innovation, cost-to-serve, and even go-to-market approach.

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Whale Curve Spotlight Cover

Not all revenue is good revenue

Executives recognize the value of portfolio optimization, but many efforts merely trim the tail. Go deeper to achieve a 20%–40% improvement in EBITDA. Read our latest issue of Vantage Point to learn how using our 5 Facet Approach.

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Most businesses don't know where they really make money

Traditionally, businesses used standard costs based on fixed and variable costs to make decisions regarding product rationalization, pricing, and new product development. Today, however, complexity has changed the game. Armed with the knowledge from WP&C's Square Root Costing, companies can build better strategies around business problems such as product mix, innovation, and international expansion—enabling them to better compete in our complex world.

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Learn how we helped a beverage market leader benefit $35M in the first year of tackling complexity

View Case Study

“WP&C is helping us transform our business. Their insights are phenomenal!”
Dave Hoogmoed
Dave Hoogmoed, President Land O’Lakes Purina Feed
“Wilson Perumal & Company's approach treats complexity as the enemy. Declaring war is the most direct route to an efficient, profitable enterprise. We declared war on the complexity in our portfolio, resulting in streamlined customer offerings and a more nimble business.”
Ed Lonergan
Ed Lonergan, President and CEO Diversey, Inc.
“This was a quick and painless way to understand our true product profitability, and it challenges how we think about our business. I am extremely pleased with the results.”
Fernando Palacios
Fernando Palacios, EVP and Chief Integrated Supply Chain Officer MillerCoors LLC
“WP&C’s insights into our portfolio, cost structure and growth drivers have changed the way we think about our business. The brand management playbooks they developed for the business will be critical to how we make decisions going forward.”
Hilliard Lombard
Hilliard Lombard, Managing Director Valeo Foods Group Ltd.
“I have been more than pleased with what you have been able to accomplish in this time. Beyond my expectations...Spectacular!”
Peter Benton
Peter Benton, COO Worldwide Clinical Trials, Inc.
“Fantastic piece of work! You’ve really shed a lot of light on our business. Inmarsat will benefit enormously from your contribution and we will be using your structured thinking to guide us through the decision-making to come.”
Rupert Pearce
Rupert Pearce, CEO Inmarsat plc
“If you take all six times [past projects] where we looked at this, over the past ten years, and rolled them all up together, and multiplied by ten, it would still not be as good as this work.”
Bill McNabb
Bill McNabb, CEO Vanguard Group, Inc
“Army personnel credit the collaboration between Joint Munitions Command, CAAA's higher headquarters, and consulting firm Wilson Perumal & Company for identifying areas to improve the munitions distribution process.”
U.S. Army News
U.S. Army News

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