In the current economic environment, many business leaders are finding it difficult to grow the bottom line. Often, either because of frustration or desperation, strategy defaults to price-cutting. The storied logic is the same, “What we lose in margin we will make up for in volume.” If this strategy is done without careful analysis, these may literally become ‘famous last words.’
We suggest there is a better and more strategic way to approach profit improvement. Assuming that your company has a good grasp of its sustainable competitive advantage (SCA), consider this as your Three-Point Profit Improvement Strategy:
- Conduct a Waste Audit. Most businesses usually put most of their energy into increasing sales. However pushing more business through an inefficient system makes no sense. Waste can account for up to 30% of a company’s operating cost and eliminating it represents the single greatest opportunity to improve profitability. It is important to take time to identify the wide range of waste issues within your company. We suggest that the identified wastes be prioritized so that the most important issues are dealt with first. You don’t have enough time to tackle the issues yourself, so consider using a team process to create the waste elimination plan; but be diligent in measuring the team’s progress toward achieving the overall objective.
- Perform a Pricing Review. This is a critical step. If you price too high you will miss sales; price too low and you’ll leave money on the table. While cost of production is often used to set prices, more must be considered if you want to succeed in an increasingly competitive environment. In setting your price, you must also consider what your competitors are charging. Your competitor’s price shouldn’t necessarily dictate your price, but it is a point of reference. The best way to make a comparison with competitors is try to determine “What the Market will Bear” – i.e., what customers will pay for your product. We suggest you conduct a Product Benefits Analysis to score your product against your competitors and see what price you can demand due to the relative score of your product compared to your competitors. Such an analysis might reveal that you are justified in reducing prices, or it might also reveal that your product is positioned for ‘premium’ pricing relative to the competitors and you can feel more comfortable actually taking a price increase.
- Once you are comfortable that you’ve eliminated waste and are confident in your pricing, you are ready to address marketing. A Marketing Audit involves assessing your company’s performance on key factors that are critical to long term success. These factors might include customer satisfaction, product knowledge, internet strategy, sales growth rates, etc. The answers to these questions vary from company to company and there is no right or wrong answer. How will you fix the poor performing areas that are obvious? Make a decision and implement it. If it works do more of it. If it doesn’t work do something different.
Once this process is complete you will have better control on your costs and pricing, and your marketing strategies will be better aligned with your product positioning. This is a practical and effective way to approach profit improvement.