Secrets for Creating Long Term Shareholder Value

Creating shareholder and stakeholder value is probably the primary reasons for most companies to exist. Without growing value for these two, there is eventually no company and no job. As the company grows so should shareholder value, just like investing in a share of stock. This can also go the other direction if company the executive team and management fail to analyze the business intelligence work to identify duds in the product offering or jewels that could rise to the top.

"We measure success by creating long term shareholder value. If it's to show up every day and collect a paycheck, why bother."
Executive leadership

First, let's outline these two key groups.

Shareholder: has a vested interest in the company success and value creation for gain and some type of exit strategy.

Stakeholder: receives value from the product or service which the company offers or benefits indirectly from the company success or going concern. Entities like a vendor who will grow as company sales grow, a reseller of a branded product line, safety or other benefits realized by the product end user, or a patient benefiting from resources, equipment, or services provided. Company staff benefiting from growing salaries, bonuses, and career advancement.

Although the breakdown of profitability for any single product is one of many elements in a company's overall value calculation, it is nonetheless a starting point for analyzing profitability for a company whose primary source of revenue is selling products. The exercise helps identify which products in the lineup are actually profitable and which ones cost more than they're worth and should be discontinued.

Product profitability is often thought about in simple terms of gross margin – the difference between how much is paid to acquire the product and how much is collected when it's sold. Things like procurement costs, cost of sales, product management, and customer service are often pushed into other portions of the P&L or overlooked altogether. Looking at product level profitability tries to break down the various direct costs and considers a product's long term value to the company.

"Great product! We'll add it to our website and see how it goes"
Online shop owner

Products to be reviewed are either already part of the company's offering or may be new products to be added as part of a growth strategy. For the latter, this article will help drive forethought before adopting the blind growth strategy of simply adding products to the offering and see what happens. This strategy is implemented by looking at gross margin and potential target customer interest, and winging it. "If we add more products, we'll make more money", strategy. Products sold using a drop ship model typically fall into this category.

This short article aims to help small companies think about profitability in a broader manner. Whether reselling branded or unbranded products, online or in-store, doesn't matter. The concept of growing a business based on more than raw gross margin adds long term value the company, creating a stronger exit strategy or richer dividends year on year.

So let's break down the real cost of adding and maintaining a product, and whether the company actually making money on it or just turning cash. The list below provides an outline of key points to consider and expand upon.

Profitability and product value metrics that matter.

Customer acquisition cost

Marketing
Online presence
Social media
Email
Mail
Product presentation

Other Costs of Sales

Sales commissions
Sales salaries
IT Salaries
Cost of A/R
Promotional marketing

Cost of Operations

Customer service
Bookkeeping
Sourcing personnel and systems
General infrastructure
Management
Receiving and quality control
Warehousing
Picking and packing
Dispatch and tracking
Returns and restocking

Gross Margin

Cost v. Selling price

Competitive pricing

Acquisition costs

Effective sourcing
Supply chain staff
Transportation
Cost of cash

Competitive landscape

Competitive products
Market saturation
Market demand

Growing a business based on more than just raw gross margin adds long term value the company
Business broker

Long term value creation

Percent of repeat customers
Annual inventory turns
Y/Y cost reductions
Product consumption
Customer relationship lifetime period
Brand representation
Protected territory
Special brand sponsored programs
Participation in brand growth
Shareholder value

Focusing on the details of product level costs, and the value each one brings to the organization, aims to increases margins and root out opportunities to create more efficient workflow processes. This exercise should also help identify products that can achieve long term value by lowering average customer acquisition costs through repeat business over the lifetime of the relationship – characteristics typical of consumable products like sandpaper and paper products. These elements also reduce long term cost of operations and increased process efficiency by eliminating repeated sourcing costs, active product management, and customer notifications.

Customer acquisition cost section is singled out to cause reflection on real costs associated with gaining a new customer or transaction. Keeping an existing customer should be cheaper than the cost of finding a new one. Having a customer return over and over again reduces the average customer acquisition cost with each transaction. If they return to buy the same product, that product adds value with each repeat purchase.

Branded products further reduce risk of quality and performance failures which lead to added costs of damage control and customer relationship management. They also tend to lead in innovation of design and features sought by their buyers, keeping ahead of competitors. Gaining brand representation with protected territory further protects the company's investment in developing sales while also participating in the brand's growth and marketing – a benefit similar to securing a franchise but without the costs or obligations. Another key benefit is pricing power enjoyed by leaders in the space or category.

Branded products have pricing power and may offer reseller protected territories or franchise opportunities
Business broker

Long term value creation ties in with shareholder exit strategies, stock options, M&A, salary increases, and bonuses, to name a few. It is also a key driver of executive level decision making in the organization. The challenge is that the executive teams are usually split into sales and marketing, finance, and operations departments with everyone checking different metrics of success. Mid-level managers aren't necessarily connected with other departments or trained to look at cross departmental impacts.

Companies most effective at building product value review teams try to include key personnel from each connected process. This allows the sales team to discuss sales and marketing efforts and budgets, the operations team can look at costs of product management, and the finance team can better define short and long term value creation for the company and stakeholders.