The short answer
An EBITDA bridge has five levers, and the order is the entire argument: price, mix, share gain, M&A, cost.
Price goes first because of arithmetic, not preference. A dollar of price is roughly a dollar of EBITDA — it flows through at about 100%, because the order already exists, the truck was already going, the part was already made and the invoice was already going to be cut. Nothing changes in the operation except the number on the paper, and it executes inside a single quarter. On a $150 million business, one point of price is $1.5 million. To buy that same $1.5 million out of volume at a 30% incremental contribution margin you need $5 million of new revenue — realistically seven or eight, three or four quarters, and complexity on the way in. To buy it out of cost in a business carrying $30 million of SG&A, you have to take out 5% of overhead: twelve to fifteen people, two quarters to execute, a year before it stops bleeding back. Same dollar, three completely different prices.
Cost goes last for one reason: you cannot know which costs are bad until you know which revenue is good. Bad cost is defined by the revenue it serves.
And one rule governs the whole thing: if a line on the bridge does not have a dollar figure and an owner, it is not on the bridge. Then the bridge gets reviewed monthly, lever by lever, owner by owner. Monthly, or it is decoration.
Why do almost all CEOs build the bridge in the wrong order?
There is a slide Bill Canady has seen in maybe sixty different companies, and it is always the same slide. The EBITDA bridge. Bar on the left is this year, bar on the right is next year and it is taller, and in between five or six little floating blocks marching up the page — red, green, sometimes yellow — each one with a label on it. Pricing excellence. Commercial effectiveness. Operational discipline. Strategic sourcing.
He points at the third block and asks a friendly question: how many dollars is that one?
There is a small silence. Somebody says, “That one’s directional.”
Next question. Whose is it? Not which function — which human being. Give me a name. Longer silence.
Be fair to that room. Those people are not lazy and they are not stupid. The slide took three weeks. There are twelve tabs behind it and every number in every tab ties. It went to the board and the board nodded, because the board sees a hundred of them a year and has stopped reading them too.
But that slide will not move one dollar of EBITDA. It is a picture of intention, and intention is not a lever. You cannot pull a color.
Here is where the order goes wrong. You are somewhere in the back half of your first year — Phase Two. The segmentation is done, you know where profit lives, you have started retiring complexity, and now the sponsor wants a number with a path attached: 10 to 12% EBITDA growth every year for the length of the hold. That is what the deal was underwritten on. Twelve is the new five.
So you sit down to build the bridge, and the first thing on your list is cost. It is always cost. Headcount, spend, freight, indirect procurement, that consulting contract nobody remembers signing.
Cost feels like the only lever that lives inside your building. Price feels like it belongs to the customer. Volume feels like it belongs to the market. When a board is squeezing you, you reach for the thing you think you own.
There is a second reason, and it is the more dangerous one. Cost is visible. Cost has a line on the P&L with a dollar amount printed next to it. Revenue quality does not. There is no line on your income statement that says revenue we should never have accepted. So when you go looking for the problem, you find it where the light is.
What does a cost-first program actually do to a company?
Watch it run. You announce a 15% reduction in indirect spend and a hiring freeze. Where does the organization go to find it? Where the spending is visible and the fight is smallest — the functions serving your biggest, cleanest, most profitable accounts, because that is where the volume is, where the people are, where the spend shows up.
Nobody cuts the Quad 4 tail. The Quad 4 tail does not have a budget line. It does not have a department. It is 4% of revenue distributed across eleven functions in slivers of Tuesday afternoon. It is invisible, and it survives every cost program ever run, because you cannot cut what you cannot see.
Six months later, here is your business. You took twelve people out of the group that serves your top quintile. Service level to your best customers dropped and they feel it. Lead times went out. And the bottom of the book — the accounts eating 27% of your capacity to produce 4% of your revenue — is completely untouched. Still calling, still expediting, still getting a 14% discount somebody granted in 2019.
You did not cut cost. You cut capacity that was serving the profitable core, and you paid for the privilege. That is the most common self-inflicted wound in the middle market, and it happens because a competent person went looking for savings in the only place the accounting system would show them.
Why is price the first lever?
Two reasons, both arithmetic.
One: flow-through. A dollar of price is roughly a dollar of EBITDA. No other lever on this bridge does that. A dollar of new revenue is thirty cents. A dollar of cost taken out is a dollar, but it takes three quarters and it takes people.
Two: speed. Price is executable inside a quarter. You are already sending those customers invoices — the mechanism exists.
Most CEOs hear “price” and immediately think “price increase,” then immediately think about the four accounts who will scream. Put that down. That is not where the money is. The money is in your corridor.
What is a pricing corridor, and how wide is yours?
Take one SKU. One. Same part number, same specification, same box.
Now pull every account that bought it in the last twelve months and calculate the net price each one actually paid — and net means net. After list, after the contract discount, after the volume tier, after the annual rebate, after the freight allowance, after the marketing co-op, after whatever a district manager gave somebody in a parking lot. Landed, net, per unit.
Sort them lowest to highest and chart them.
That spread — the distance between your best-priced and worst-priced account on an identical product — is your corridor. In every business Bill has ever done this in, it is between 15 and 30 points wide. On the same part.
He has never once seen a CEO look at that chart and not go quiet.
What do you do when somebody says “that’s volume”?
The argument always arrives in the same shape, and usually from somebody very good — usually the VP of Sales. “Bill, that’s volume. The guy at the bottom of that chart buys ten times what the guy at the top buys.”
Fine. Test it. Take the same chart and plot volume against net price. Every account, one dot.
If the story were true you would see a line: big buyers cheap, small buyers expensive, a clean downward slope you could put a ruler on.
You will not see a line. You will see a cloud. You will find a customer buying 11,000 units a year paying more than a customer buying 900. You will find two accounts of nearly identical size 18 points apart. And when you pull the file to find out why, the answer is never a volume commitment. It is that in 2017 a salesperson was trying to close a quarter, or a national account manager matched a competitor quote the competitor never actually made, or somebody inherited a contract and just kept renewing it.
That scatter is the finding that ends the argument in the room. Not your opinion. Not a benchmark. Their own data, on their own product, on a chart anybody can read.
So what do you do with it? You do not try to move everybody to the top of the corridor — that is how you lose accounts and deserve to. You take the bottom third and move it toward the median of your own book. And the reason that conversation works with a customer is that it is not a price increase, it is a correction, and you can show them exactly where they sit relative to accounts like them.
Closing the bottom third of the corridor toward the median is typically worth one to three points of margin. On $150 million, one point is a million and a half and three points is four and a half. That is your first bridge line: dollar figure, owner’s name — usually the commercial leader, with the CFO holding the measurement.
What is mix, and why does handing it to finance kill it?
Mix is second, and it is the most misunderstood lever on the list.
Mix is not pricing. Mix is selling the same total dollars with a different composition. Same revenue, different profit. Move a point of volume from Quad 4 into Quad 1 and nothing about your price list changed, nothing about your cost structure changed, and EBITDA went up.
Here is what people get wrong. They treat mix as a pricing problem, so they hand it to finance, and finance builds a beautiful analysis showing which products and segments should grow. Then nothing happens for eleven months.
Mix is a sales compensation and sales coverage question. That is it. Your sales force is selling exactly what you pay them to sell, in exactly the accounts you assigned them to cover. If the comp plan pays on revenue you will get revenue, and you will get it from wherever it is easiest to find — the bottom of the book, because the bottom of the book always says yes.
So the mix line has two mechanics under it and neither is a spreadsheet. One: change what the plan pays for — gross margin dollars, or Quad 1 and Quad 2 volume specifically. Two: change who covers what — take your best three reps off the accounts that are already loyal and low-margin and put them where the profit lives.
Owner: the commercial leader again, usually with HR on the comp plan. Put a date on the comp plan change — comp plans run on an annual cycle, and if you miss it you have lost a year.
When is share gain real, and when is it an adjective?
Third. Real, but slower, and it comes with a condition attached.
Share gain means taking business from a competitor in the segments where you already make money. Not new segments. Not new geographies. The places you are already good, where you have a right to win.
It is third for the reason everything is ordered in this system: you have to have earned it. If your right-to-grow ratio is under threshold, share gain does not convert. You will win the account, serve it badly, discount it to keep it, and eighteen months later have more revenue, the same EBITDA and a tired organization.
Share gain lines are the ones most likely to be adjectives. “Win rate improvement.” Kill it unless somebody can tell you which competitor, which accounts, how many dollars, by when, and whose name is on it.
Why is M&A the fourth lever instead of the first?
Because M&A is the lever every sponsor loves and the one most likely to end your tenure.
M&A works. Buying revenue at seven times and selling it inside a platform at eleven is real value creation. But it only works after the operating system is installed — after segmentation, after the complexity work, after you have a cadence that actually runs.
Buy a company before that and you have bought complexity and imported it, at a premium. You now have two chart-of-accounts structures, two ERP systems, two pricing books with two different corridors, two Quad 4 tails, and a management team already at capacity running an integration on nights and weekends.
The tell is simple. If you cannot currently produce a segmented P&L for the business you already own, you are not ready to buy another one.
What happens when cost goes fifth?
Last. Full stop.
Notice what changes. By the time you get here you know which customers are profitable, which products are profitable, and which of your capacity is serving good revenue versus serving the tail. So when you take cost out, you are taking out the cost that serves revenue you have already decided you do not want — and putting cost structure in where you do want it.
That is not a cost reduction program. That is the arithmetic consequence of the four decisions above it. It is specific, it is defensible, and it does not come back, because the work that generated it is gone.
Run cost first and you cut muscle. Run cost fifth and you are cutting something that is already dead.
What keeps a bridge honest?
Two things hold this together, and they are both unglamorous.
The rule: if a line on the bridge does not have a dollar figure and an owner, it is not on the bridge. Not “we’ll firm it up.” Not “that one’s directional.” It is off — delete the block. A bridge with three real lines and two blank spaces is honest, and you can manage honest. A bridge with six colored blocks and two real numbers is a document you will spend a year defending instead of a year executing. One page, five lines, a number and a name on each. If your bridge does not fit on one page, it is not a bridge, it is a wish list with a chart on it.
The cadence: monthly. Not quarterly. Lever by lever, owner by owner, each person presenting their own line — what was committed, what landed, what the variance is, what the countermeasure is. Twenty minutes, same order every month, price first. Run it in your staff meeting, your MOR, your MBR — the venue does not matter.
Quarterly review means a lever can be off track for ninety days before anybody says the word out loud, and ninety days is a third of your operating year. Monthly means the miss is eleven days old when it hits the table and there is still time in the year to recover it. Monthly or it is decoration.
How do I start this week?
Three moves.
Move one — build the corridor chart on your single highest-volume SKU. This week. One product, the one you ship the most of. Pull every account that bought it in the last twelve months, calculate net price per unit after every discount, rebate, allowance and program, sort low to high, chart it. Then add a second chart: volume on one axis, net price on the other, one dot per account. Your analyst can do it in three days if the data is clean and nine if it is not — and if it takes nine, that is a finding too. Do not send it around. Walk it into a room and put it on the wall; this is a chart that has to be seen, not forwarded. Then size the bottom third: if those accounts moved to the median of your own book, what is the number? That is your first bridge line, in dollars.
Move two — put the five levers on one page with a dollar figure and a name on each. Five rows: price, mix, share gain, M&A, cost. Three columns: the number, the owner, the date. Fill in what you actually have; if share gain is blank, leave it blank. And the owner is one person — not a function, not a team, not a steering committee. Do not write “Sales.” Write the name. The person who presents it every month is the person who owns it.
Move three — put the monthly bridge review on the calendar for the next six months before you leave the room. Six invitations, six dates, one hour each, same slot, sent while everybody is still sitting there. This is not a productivity tip. The single most reliable predictor of whether a bridge delivers is whether the first six reviews existed on a calendar before anybody left the room where it was built. If it goes on the calendar later, it goes on the calendar never — because by then there is a customer visit.
What are the five ways this falls apart?
The failures are not creative. There are five of them.
One. Adjectives instead of commitments. “Pricing excellence.” “Commercial effectiveness.” If you cannot state the line as a dollar amount it is not a commitment, it is a mood. Test: can the owner say the number out loud without looking at the slide?
Two. Benchmarks instead of your own company’s data. Somebody brings a study showing companies in your sector capture two points of price. That is interesting and worth exactly nothing, because it does not tell you which of your accounts to call on Monday. Your corridor chart does. Build the bridge out of your own transactions or do not build it.
Three. Orphaned levers. A line with a function next to it instead of a person. “Sales.” “Operations.” Nobody has ever been held accountable for a line item owned by a noun. If two people own it, nobody owns it.
Four. Cost first. The most expensive of the five. You cannot know which costs are bad until you know which revenue is good. Cost is fifth. It stays fifth.
Five. No monthly measurement. The bridge gets built in March and looked at again in October, and in October the news is bad and there are eleven weeks left in the year — not enough time to do anything except explain.
When it is working it is boring. Same page, same five rows, same order, twelve times a year. Somebody’s line is behind and they say so in the first sentence, then they say what they are doing about it, and it takes four minutes. When it is theater there is a new deck, the blocks have new names, somebody added a sixth lever called “digital,” and nobody in the room can tell you what the price line was supposed to deliver this month — because it was never a number in the first place.
Why does this decide what the business is worth?
Enterprise value is EBITDA times a multiple. Everybody talks about the multiple like it is weather — something that happens to you depending on the market, the banker and the mood of the room. It does re-rate, slowly, in Phases Three and Four as the business de-risks.
But the first term is not weather. The first term is five decisions, sized in dollars, owned by five people, checked twelve times a year.
That is the whole difference between building value and hoping for it. Luck is the residue of design, and the bridge is where you do the designing.
Frequently asked questions
What is an EBITDA bridge? An EBITDA bridge is a one-page plan showing how this year’s EBITDA becomes next year’s, broken into the specific levers that will move it. In Bill Canady’s version there are five levers — price, mix, share gain, M&A and cost — and every line carries a dollar figure, a single named owner and a date. A block with a label but no number is not a lever; it is a picture of intention.
What order should the five EBITDA levers be pulled in? Price, mix, share gain, M&A, cost. Price first because a dollar of price flows through to EBITDA at roughly 100% and executes inside a quarter. Cost last because you cannot know which costs are bad until you know which revenue is good. Every other order cuts muscle and calls it discipline.
Why does price flow through at 100%? Because the order already exists. The truck was already going, the part was already made, the invoice was already going to be cut. Nothing changes in the operation — only the number on the paper. By comparison, a dollar of new revenue is worth about thirty cents of EBITDA at a 30% incremental contribution margin.
What is a pricing corridor? The spread between the best-priced and worst-priced account on an identical product, measured on net price per unit after every discount, rebate, allowance and program. In every business Bill Canady has run this in, the corridor is 15 to 30 points wide on the same part number, and it is not explained by volume. Closing the bottom third toward the median of your own book is typically worth one to three points of margin.
Why is cost the last lever instead of the first? Because bad cost is defined by the revenue it serves. A cost-first program goes where spend is visible, which is the functions serving your best accounts — while the Quad 4 tail, at roughly 4% of revenue and 27% of capacity, survives untouched because it has no budget line. Run cost fifth and you are removing capacity attached to revenue you have already decided you do not want.
When is M&A the right lever? Only after the operating system is installed — after segmentation, after the complexity work, after the cadence actually runs. Buying revenue at seven times and selling it inside a platform at eleven is real value creation, but bought early it imports complexity: two ERP systems, two pricing corridors, two Quad 4 tails. The test: if you cannot produce a segmented P&L for the business you already own, you are not ready to buy another one.
How often should the EBITDA bridge be reviewed? Monthly, lever by lever, owner by owner, with each person presenting their own line — commitment, result, variance, countermeasure. Twenty minutes, same order every month. Quarterly review lets a lever sit off track for ninety days, a third of the operating year. Monthly means the miss is eleven days old when it hits the table. Monthly, or it is decoration.
Find out what your bridge actually has to deliver.
The Board’s Number calculator reconstructs the underwriting behind your deal — entry EBITDA, entry multiple, target MOIC, hold period — and solves for the exit EBITDA you actually have to produce. That number is the total the five levers have to add up to. It takes about ten minutes.
Run the Board’s Number calculator
Related
- The 1,000-Day Framework — the full four-phase method
- The Complexity Tax: Why 4% of Revenue Eats 30% of Capacity — the work that has to happen before cost comes out
- Zero-Up: Rebuilding the Budget From Zero — the other half of Phase Two, and where the freed capacity goes
Full transcript
EP06 — Price First, Cost Last: The Five-Lever Bridge
[00:01] A thousand days. That’s enough time to transform a company, but not enough time to waste. Welcome to the 1,000 Day CEO, the podcast about decisive leadership, sustainable growth, and building a business that thrives beyond any one leader. Your host is Bill Canady. Let’s make every day count. >> There’s a slide I’ve seen in maybe 60 different companies, and it’s always the same slide. It’s the EBITDA bridge. The bar on the left is this year, the bar on the right is next year, and it’s taller. And in between there are five or six little floating blocks marching up the page. You know them, they’re red and green, yellow sometimes. Each one’s a different color, and each one with a label on it. Pricing excellence, commercial effectiveness, operational discipline, strategic sourcing. I’m sitting in the room and I ask I point to the third block and I say, “How many dollars is in that one?” And there’s a small silence that I’ve come to enjoy in a way that probably isn’t very kind. Somebody says, “Well, that one’s directional.” So, I ask the next question. “Well, whose is it? Not what function, not what what area, which human being? Give me their names.” A little bit longer silence. Now, I want to be fair to that room because those people are not lazy and they’re certainly not stupid. That slide took 3 weeks. Somebody stayed late on it. There are 12 ti- tabs behind it and every number in every tab ties. It went to a board, and the board nodded because the board sees a hundred of them this year and they’ve stopped reading them, too. But that slide will not move $1 of EBITDA, no matter how bad you want it to. Not one. It’s a picture of intention, and intention is not a lever. You cannot pull on a color. Okay, so let me start with the proof here. One point of price on a $150 million of revenue, one point of price is one and a half million dollars. And here’s the part that matters. It flows through the EBITDA roughly 100% not 30, not 40, 100
[02:03] because the order already exists. The truck was already going. The part was already made. The invoice was already going to be cut. Nothing changed in the operation. The only thing that changed is the number on the paper and you can execute it inside of a quarter. Now hold that up against the alternatives because this is the whole episode in one comparison. To produce that same one and a half million dollars out of volume at a 30% incremental contribution margin, you need five million dollars of new revenue and that’s if the new revenue is free which it never is. Realistically, you need seven or eight and need three or four quarters to land it and you will probably add complexity on the way in. All right, to produce it out of cost in a business carrying 30 million dollars of SD&A, you need to take out 5% of your overhead in a middle market company, that’s 12 to 15 people. Two quarters to execute, a year before it starts bleeding back. Same dollar, three completely different prices to buy. Now here’s my promise, by the end of the next half hour, you’ll be able to build your own EBITDA bridge, the five levers in the right order with a dollar figure and a human being named on every single line. This is important. And you will know which one to pull first and which one to pull last. Here’s the plan, five levers in order. I’ll walk you through all five, tell you why the order is an entire argument and then give you the five the five specific ways I watch this thing fall apart in real companies. This is a 1000 Day CEO, I’m Bill Canady. Let’s get into it. All right, we’re going to start with the problem. Let’s talk about why almost every CEO gets the order backwards. You’re somewhere in the back half of your first year, phase two. You’ve done the segmentation, you know where the profit lives. You started retiring complexity and now the sponsor wants the number, not a story, a number with a path attached to it. 10 to 12% EBITDA growth every year for the length of the hold. That’s what the deal was underwritten on. 12 is the new five. Remember we talked about this earlier.
[04:05] So, you sit down to build the bridge and I would tell you with a very high degree of confidence that what the first thing on your list is going to be, cost. That’s where we all start. Always cost. Headcount, spend, freight, indirect procurement, that consulting contract nobody signed. And I remember exactly why, because I did it, too. So, I get it. Cost feels like the only lever that lives inside of your building. Price feels like it belongs to the customer. Volume feels like it belongs to the market. Cost feels like it belongs to you. And when the board is squeezing on you, and they will, you reach for the thing you think you own. There’s a second reason, and it’s the more dangerous one. Cost is visible. Cost has a line on the P&L with a dollar amount printed to it. Revenue quality does not. There is no line on your income statement that says, “Revenue we should have never accepted.” So, when you go out looking for the problem, you find it where the light is. Now, here’s the sentence I want you to write down, and the reason it’s cost goes last on the bridge. You cannot know which costs are bad until you know which revenue is good. Bad cost is defined by the revenue it serves. Think about what a cost-first program actually does inside of a real company. You announce a 15% reduction in indirect spend and a hiring freeze. Now, where does the organization go to find it? It goes to where the spending is visible and where the fight is smallest, which means it goes to the functions that serve your biggest, cleanest, most profitable accounts, because that’s where the volume is. That’s where the people are. That’s where the spending actually shows up. Nobody cuts the quad four tail because the quad four tail doesn’t have a budget line. It doesn’t have a department. It’s 4% of your revenue distributed evenly across 11 functions in slivers of Tuesday afternoons. It’s invisible. It survives every cost program, every run, because you can’t cut what you don’t see. So, 6 months later, here’s your business. You took 12 people out of the group that serves your top quartile. Your service
[06:06] level to your best customers has dropped, and believe me, they feel it, because your lead time went down, and the bottom of the book, the accounts eating 27% of your capacity to produce 4% of your revenue is completely untouched. Still calling, still expediting, still getting a 14% discount somebody granted in 2019. You didn’t cut costs, you cut capacity that was serving the profitable core, and you paid for the privilege. This is not hypothetical. That is the most common self-inflicted wound on the entire middle market. I can’t tell you the amount of times we’ve said, “You got to get out costs.” And they come back with just, “We’re getting rid of people we don’t care for.” Which they probably should do, right? They’re underperformers. But they don’t come and look at and say, “Where are we winning and losing?” And it happens because a competent person went looking for savings in the only place the accounting system was willing to show them. Now, let me tell you why this matters beyond the operating year, because I want you to think about the exit while you’re doing this. Enterprise value is EBITDA times a multiple. Two terms, the multiple re-rates slowly, and it re-rates in the phase three and phase four of the business as it de-risks. We’ll spend a whole episode on that at the end of the season. But the first term, EBITDA, is not something that happens to you. It is a construction. It is built out of a specific number of moves, each one with a size and an owner. The bridge is how you move the first term on purpose of instead of hoping. Now, here’s the rule that governs the entire thing. I’m going to give it to you now, and I’m going to repeat it because it’s the only enforcement mechanism this framework has. If a line on the bridge does not have a dollar figure and an owner, it is not on the bridge. Not will firm it up, not that one has directional, it’s off. Delete the block because a bridge with three real lines and two blank spaces is honest and you can manage honest. A bridge with six colored blocks and two real numbers is a document you will spend a year defending instead of a year
[08:06] executing. All right, here’s the framework and how we do it. levers, price, mix, share gain, M&A, cost, in that order. Let me take them one at a time and I’m going to spend the most time on the first one because that’s where the money is and that’s where the fight is. Lever one, price. Price is first for two reasons and they’re both arithmetic. One, flow through. A dollar of price is roughly a dollar of EBITDA. No other lever on this bridge does that. A dollar of new revenue is 30 cents. A dollar of cost taken out is a dollar, but it takes three quarters and it takes people. Two, speed. Price is executable in a quarter. You’re already sending those customers invoices, remember? The mechanism exists. Now, most CEOs hear price and they immediately think price increase. Then immediately think, what about the four accounts who will scream? Put that down. That’s not where the money is. The money is in your corridor. Here’s what a pricing corridor is. Take one SKU, one, the same part number, same specification, same box. Now, pull every account that belongs in the last 12 months and calculate the net price each one actually paid. And I mean net, after list, after contract discount, after the volume tier, after the annual rebate, after freight allowances, after the marketing co-op, after whatever a district manager gave someone in a parking lot. Landed net per unit. It’s important. Now, sort them lowest to highest and and them on a chart. That spread, that this is between your best for price count and your worst price account on an identical product is your corridor. And in every business I’ve ever done this in, it is between 15 and 30 points wide. 15 and 30 on the same part. I’ve never once seen a CEO look at that chart and not go quiet. Then comes the argument, and you need to be ready for it because it always arrives in the same shape. Somebody in the room, usually somebody very good, usually the
[10:07] VP of sales, will say, “Bill, that’s volume. The guy at the bottom of the chart buys 10 times what the guy in the chart buys.” Fine, let’s test. Take the same chart and plot volume against next price. Every account, one dot. If the story were true, you’d see a line. Big buyers cheap, small buyers expensive. A clean downward slope you could put a ruler on. You will not see a line. You’ll see a cloud, a big jumble of dots. You will find a customer buying 11,000 units a year paying more than a customer buying 900. You will find two accounts of nearly identical size 18 points apart. And when you go pull the file and find out why, the answer is never a volume commitment. The answer is always that in 2017, a sales person was trying to close a quarter or a national accounts manager matched a competitor quote, and the competitor never actually made or somebody inherited a contract and just kept renewing it. The scatter in the finding that ends the argument in the room. That scatter does it, not your opinion, not a benchmark. Their own data on their own price chart anyone can read. So, what do you do with it? You do not try to move everybody to the top of the corridor. That’s how you lose accounts and deserve to. You take the bottom third of the corridor and you move it towards the median. Not at the best price, to the median of your own book. And the reason that conversation works with a customer is that it’s not a price increase, it’s a correction. And you can show them exactly where they sit relative customers like them. Closing the bottom third of the corridor towards the medium is typically worth one to three points of margin. On a $150 that’s one point. That one point is a million and a half and three points is four and a half million. It’s real money. That is your first bridge line, dollar figure, owner’s name. Usually the commercial leader with the CEO holding the measurement. Second lever, mix. Mix is second and it’s the most misunderstood lever on the list. Mix is not pricing. Mix is selling the same total dollars with a different composition. Same revenue, different
[12:10] profit profile. The move a point of volume from quad four into quad one and nothing about your price list changing, nothing about your cost structure change, and your EBITDA goes up. We like it. Here’s the thing people get wrong. They treat mix as a pricing problem. So they hand it to finance and finance builds a beautiful analysis showing which product and segment should grow. And then nothing happens for 11 months. Mix is a sales compensation and sales coverage question. That’s it. Your sales force is selling exactly what you’re paying them to sell in exactly the accounts you’ve assigned them to cover. If your comp plan pays on revenue, you will get revenue. And if you get it from wherever it’s easiest to find, which is generally the bottom of the book because the bottom of the book always says yes. So the mix line in your bridge has two mechanics underneath it and neither of them is a spreadsheet. Change what plan pays for. Gross margin dollars or quad one or quad two volume specifically. Two, change who covers what. Take your best three reps off accounts that are already loyal and low margin and put them where the profit lives. Owner, the commercial leader again, usually with HR on the comp plan. That’s who owns this thing. And put a date on the comp plan change. Good lord, they’ll drag it out forever. They don’t want to do it or they’re going to do it immediately. It’s got to be thoughtful, and they got to go through it because a comp plan has an annual cycle. And if you missed it, you lose a year. It’s hard to do it in the middle of the cycle. People will get bent out of shape about it. Third lever is all about share gain. It’s third, it’s real, but it’s slower, and it comes with a condition attached. Share gain means taking business from a competitor in the segments where you already make money. Not new segments, not new geographies, the places you’re already good where you have a right to win. The reason it’s third is the reason it’s third everywhere in this system. You have to have earned it. If your right to grow ratio is under threshold, share gain does not convert. You will win the account and then serve it badly, and
[14:11] then discount it to keep it. And 18 months later, you’ll have more revenue at the same EBITDA and a tired organization. This is important here. Share gain line in a bridge are the ones most likely to be agitated. Win rate improvement. Kill it unless somebody can tell you which competitor, which accounts, how many dollars, by when, and whose name on. The fourth lever, M&A, everyone’s favorite topic. It’s exciting. It’s fourth, and I want to be careful here because M&A is the lever every sponsor loves, and it’s the one most likely to end your tenure. M&A works, absolutely. You need to do it. Buying revenue at seven times and selling it inside a platform at 11 is a real value creation and I’ve done it many times. But it only works after the operating system is installed, after segmentation, after the complexity work, after you have a cadence that actually runs. If you buy a company before that, here is what you’ve done. You’ve brought in more complexity, and you’ve imported it, and you’ve paid a premium to do it. You now have two chart of account structures, two ERP systems, two pricing books with two different corridors, two quad four tails. I mean, it goes on and on and on. And a management team that was already at capacity now running an integration on nights and weekends. Good luck with that. The tail is simple. If you cannot currently produce a segmented P&L for the businesses you already own, you are not ready to buy another one. Fifth lever is cost. Last, full stop. And notice what happens when it’s last. By the time you get here, you know which customers are profitable, you know which products are profitable, and you know which of your capacity is serving good revenue and which is serving the tail. So, now when you go to take costs out, you’re taking out the costs that serves revenue you’ve already decided you don’t want. Take costs out where you don’t want the revenue and put the cost structure in where you do want it. This is not a cost reduction program. That’s arithmetic consequence of the four decision above. It’s specific, it’s defensible, and it doesn’t come back
[16:12] because the work that generated it already gone. Run costs first, you cut muscle. Run costs fifth, and you’re cutting something that’s already dead. Two things hold this together. The rule, one more time, is if a line on the bridge does not have a dollar figure and an owner, it’s not on the bridge. One page, five lines, and a number and a name on each. If your bridge doesn’t fit on one page, it isn’t a bridge. It’s a list so wish list with a chart on it. And the cadence, the bridge gets reviewed monthly, not quarterly, monthly. Lever by lever, owner by owner, each person presenting their own line with what was committed, what landed, and what the variance is, and what the countermeasure is if it didn’t land. 20 minutes, same order, every month. Price first. And do it monthly or it’s just decoration. We’re back to theater here, right? Quarterly reviews mean a lever can be off track for 90 days before anybody says the word out loud. 90 days is a third of your operating year. Monthly means the miss is 11 days old when it hits the table, and there’s still time in the year to recover it. All right, we’re moving now to the plan. Three moves. The first one you can start this week, and it’s the one that changes the conversation in your building. First move, build the corridor chart that we talked about earlier on your single highest volume skew. This week, one product, the one you ship the most of. Pull every account that bought it in the last 12 months. Calculate the net price per unit after every discount, rebate, allowance, and program. Sort it low to high, put it on one chart, then add a second chart. Volume on one axis, net price on the other. One dot per account. Two charts, one product. Your analyst can do it in 3 days if the data is clean and nine if it isn’t. And if it takes nine, then you learn something new there. Do not send it around, walk into the room with it and put it on the wall. This is the chart that has to be seen, not forwarded. Then find your bottom third and size it. If those accounts move to the median of your own book, what’s the
[18:13] number? That’s your first bridge line, and you now have it in dollars. Second move, put the five levers on one page with a dollar figure and a name each. One page, five rows. Price, mix, share, M&A, call. Three columns, the number, the owner, and the date. Fill in what you actually have. If share gain is blank, then leave it blank. A bridge with three funded lines and two honest holes is worth more than a bridge with five colored blocks because you can manage the first one, and you can only defend the second. And when you assign the owner, and it is one person, not a function, not a team, don’t say sales, say it’s Bob. Not a steering committee, one name, one number. The person who presents it every month is the person who owns it. The third move, put the monthly bridge review on your calendar for the next 6 months. Not we’ll get it scheduled. Six invitations, six dates, 1 hour each, same slot every month. Send while everybody’s still sitting there. I’m serious about this, and it’s not a productivity tip. The single most reliable predictor of whether a bridge delivers is where the first six reviews exist on the calendar before anyone left the room where the bridge was built. If it goes on the calendar later, it goes on the calendar never because by then there’s a customer visit. The five ways this fails, I’ve watched this framework work and I’ve watched it fail. And the failures are not creative. There is five of them. First one, adjectives instead of commitments. Pricing excellence, commercial effectiveness. If you cannot state the line with a dollar amount, it’s not a commitment, it’s a mood. Test, see if you can the owner can say the number out loud without looking at the slide. Do they know their number? Second one, benchmarks instead of your own company’s data. Somebody brings a study showing that the companies in your sector capture two point of price. That’s interesting and it is worth exactly nothing because it didn’t tell you which of your accounts to call on Monday. Your corridor chart does. Build the price out of your own transactions or don’t build it at all. Third one, orphaned levers. A line with a function next to it instead of a person. Sales,
[20:15] operation. Nobody’s ever been held accountable for a line item that owned by a noun. If two people own it, nobody owns it. Fourth, cost first. We covered this one but it’s the most expensive of the five so I’ll say it again. You cannot know which costs are bad until you know which revenue is good. Cost first means you cut capacity that serves your profitable core because that’s where the visible spend is. Cost fifth, it stays fifth. Five, no monthly measurement. The bridge gets built in March and looked at again in October. In October the news is bad and there are 11 weeks left in the year which is not enough time to do almost anything except prepare yourself to explain to the board about what the heck went wrong and what you’re doing about it. You’ll be getting aggressive. When time is working, it’s boring. Same page, same five rows, same order 12 times a year. Somebody’s line is behind and they say so in the first sentence, and then they say what they’re doing about. It takes about 4 minutes. When it’s theater, you deck, the blocks have new names. Someone added a sixth lever called digital. Everything’s digital or AI. Nobody in the room can tell you what the Priceline was supposed to deliver this month because it was never a number in the first place. Three things worth keeping. First is the order is the argument. Price, mix, share gain, M&A, and cost. Price first because it flows roughly through at 100% and execute in a quarter. One point on 150 million is a million and a half dollars. Music to our ears, and it costs you next to nothing but nerve. Cost last because you cannot know what costs are bad until you know which revenue is good. Every other order cuts muscle and it’s called and calls it discipline. Two, your corridor is 15 to 30 points wide on the identical product. It is not explained by volume. Closing the bottom third towards the median is worth one to three points of margin. That chart exists in your business right now. Somebody just got to go build it. Third, a line without a dollar figure and an owner is not on the bridge. The bridge is reviewed monthly, lever by lever. You can do it in staff, you can do it in
[22:16] MORs, MBRs, however you want to do it, but it’s got to be monthly or it’s decoration. Here’s the framework I want to leave you with. Enterprise value is EBITDA times a multiple. Everybody in this business talks about a multiple like it’s weather. Something that happens to you depending on the market and the banker and the mood of the room. Fine, but the first term isn’t weather. The first term is five decisions, size in dollars owned by five people checked 12 times a year. That’s the whole difference between building value and hoping for it. Luck is the residual of design, and the bridge is where you do the designing. Next week we’ll take a look at the other half of this because once you know where your profit lives and what your levers are worth, you still have to build a budget the way every budget in the middle market gets built. Last year plus 5%, and last year plus 5% is how you lock in a very bad decision you’ve ever made. It’s zero up. Rebuilding a budget from zero to segment a P&L and moving people to where the profit actually is, I’ll tell you about 310 million dollar business that had zero up finish by day 270. That’s why it only worked because of the order it was done in. If you want a bridge template and a corridor worksheet, you can go find these things inside the 80/20 Institute. Hope you come sign up. Think you’ll really enjoy it. Remember, it just takes about 30 minutes to get through this stuff. I’m Bill Canady and for the love of goodness, go run your number. >> You’ve been listening to the 1,000 Day CEO with Bill Canady. Follow the show for more decisive leadership, sustainable growth, and strategies that build enduring businesses. Until next time, make every day count.
