Features
Time Is Money
Let's define the somewhat unconventional term “product-payer combination.” The words “product” and “payer” are certainly clear. The “combination” is simply a way to describe the delivery of a specific product to a beneficiary of a specific payer. For example, one combination is “standard wheelchair-Medicare,” and another is “standard wheelchair-Blue Cross.”
Product-payer (customer) combinations are the primary driver of all business revenues and expenses and, thereby, profits. This concept transcends all industries, business sizes, business models and strategies. When products are delivered to different groups of customers, a different amount of time is consumed. Likewise, different amounts of time are consumed when different products are delivered to the same group of customers.
There are several reasons for the difference. Among them, it is more difficult to get the customers associated with one payer than another. Some products require more time-consuming delivery and set-up than others. And some payers require more burdensome documentation than others. These differences all can be measured with units of time. As the old saw goes, “time is money.”
If a product generates revenue of $200 and a $100 gross profit and is delivered to a customer that consumes one hour, would it be true that it is more profitable than the same product being delivered to a customer that consumes 1.5 hours? Sure. And if you have calculated the cost of each unit of time, you can also calculate the difference in cost and in net profit. To do so, subtract both the cost of goods and the cost of the time (used by activities) to determine the net profit.
There is also a difference in the amount of productivity afforded the company in the same situation. Productivity is equal to revenue per full-time equivalent employee. If it takes one hour to generate $200 in revenue, the productivity is higher than that for the customer that generates the same revenue in 1.5 hours.
One of the two best methods of managing productivity and profitability is to focus on product-payer combinations. The way to develop a focus is with the five following steps:
- Identify your company's significant combinations
Every senior manager should have access to a report of the company's revenue by product and by payer. Apply Pareto's rule to the reports to isolate the 20 percent of the products or payers that provide 80 percent of your revenue.
