Just because a market looks attractive in a strategic plan doesn’t mean that you can serve it profitably. Before your creative folks start churning out cool ads, do a quick contribution analysis. A contribution analysis determines whether a particular target customer group contributes to the overall financial well-being of the company. In other words, is this customer group profitable?
If you’re not up to developing a complete set of financial projections, you need to at least list the assumptions for the future course of your business. Then construct a contribution analysis to determine the financial impact your strategic plan will have on your organization’s profitability.
A contribution analysis provides a projection of whether your strategy generates revenues in excess of expenses. If the contribution analysis determines that the dollar investment in the strategy you need to reach this target customer group can’t be justified, rethink and adjust your customer and financial goals. See the figure as an example.
Use this and your list of financial assumptions as a guide to conduct this analysis for each of your target customer groups. Eliminate the groups that don’t positively contribute to the bottom line. Use the groups that do contribute to the bottom line in the financial projections section of your plan.
