For channel customers, profit margin, the ability to drive traffic, trade terms, and delivery consistency all tend to play into the value equation, along with many other variables that depend on the nature of the business. An understanding of the channel customer value equation can help inform both the businesses you should be in and how you can win there. Understanding the channel value equation was particularly helpful to repositioning in oral care for P&G. At one time, P&G’s non-toothpaste oral-care products were not terribly appealing to the retailers. Inexpensive toothbrushes and largely undifferentiated rinses or flosses sold at lower volume than toothpastes did and at a lower margin—which meant that retailers were fairly ambivalent about them. Higher-end items, like electric toothbrushes, might have offered attractive margins but little in the way of volume; they sat for a long time on the shelves without turning or earning the retailers that high margin.

Retailers wanted products that would increase the total amount spent on oral care per visit—in other words, a balance of profit and volume, driven by greater engagement with the category overall. The answer was innovation—margin-boosting differentiation on floss (through Teflon technology that would enable the floss to easily slide between teeth without shredding) and category-expanding products like the CrestSpinBrush (an affordable power brush that represented a trade-up from manual brushes) and Crest Whitestrips (a totally new consumer proposition for at-home teeth whitening) that brought in entirely new spending. The dynamics of channel value were also essential to the Olay choice to stay in mass retail rather than moving up to department stores. In department and specialty stores, the manufacturer staffs its own mini beauty store within a larger retail format. Such a structure adds considerable complexity and lots of costs as the numerous cosmetics and skin-care competitors ratchet up the grandeur of their space and their level of staffing. Better to leverage existing retail relationships, the team decided, working with these retailers to create new value through an Olay premium-priced masstige positioning, which traded up current mass customers and attracted prestige customers from department and specialty stores. This strategy created more volume, profit, and margin for the mass retailers.

A key accounting activity is to slice and dice a company’s financial data as granularly as possible. This lets the leadership team view the gross margin, profit, and cash flow by categories, such as individual customer, location, product line, salesperson, etc. Accountants do this by creating a series of waterfall graphs.

Our pet peeve is when a company’s leaders think it should grow regardless of profit. This is just reckless, unless you’re a venture-backed firm pioneering new territory. For everyone else, we recommend getting profitable with the work you have, proving you can get to 15% profitability (based on our adjusted Simple Numbers), adding labor to knock profit back

to 10%, and then growing to 15% again. Lather, rinse, and repeat.

In Gary’s case, volume is detrimental to cash. The more Gary sold, the worse his cash got (his gross margin percentage was 31%, while his working capital percentage was 41%).

If you continue down the road you are on you will be counting on motivation to move the company forward. I cannot honestly recommend that as a way forward because business competition is not just a battle of strength and wills; it is also a competition over insights and competencies. My judgment is that motivation, by itself, will not give this company enough of an edge to achieve your goals.