Execution might be hard, but decisions should be easy
This year’s falling exchange rate, coupled with increasing competitive pressures and various other trends, has meant that the issue of margins has risen pretty rapidly up the agendas of many a CEO over recent months. It’s no surprise then, that a lot of my recent conversations have included discussions about how to recover margins and rebuild profitability.
Every business situation is unique, and what might be very effective in one could be damaging in another. This is where the quality of your data and insights can have a huge impact on your ability to turn margins around without damaging sales. Here are the four immediate levers you can pull to increase margins: price, discount, procurement and mix, and the insights you should be looking for to help you decide which levers to pull first.
Price: Increasing your prices is the most obvious, the most impactful (usually), and the fastest change to implement, but unless you take a fairly sophisticated approach, it can just as quickly damage volume and lose you money in the long run. The more insight you have around price sensitivity, the better your decisions will be, specifically: which products are most and least price-elastic, which are key reference points for customers versus your competition, and how might volume shift within a product category when some of the prices get changed. If you don’t have this information, make it your first priority.
Discount: In many businesses, the discount line is one of the biggest single costs, but it’s often poorly understood, particularly by the sales teams that control it. It’s easy to tighten up discounts by diktat, but a blunt-instrument approach can often do more harm than good. Addressing it through a combination of education, training and incentives is a healthier, albeit slower route, but is predicated on a good understanding of what deals, discounts and trades are really going on, and the true margins on each sale – again, if you don’t have the data, get it. More on this here.
Cost: Driving down your cost of goods, through straightforward negotiations or a more strategic sourcing approach, usually takes longer to flow through to the bottom-line, but is less likely to impact on sales as a result. Once again, the better your team’s capability and training, and the more information they have about volumes, relative margins and alternative sources for goods, the more success they’re likely to have. You can find more about the four main approaches to reducing your cost of goods here, and a framework for leading the toughest negotiations here.
Mix: Managing your mix, of both customers and products, is the best long-term approach to building margins, and should be an ongoing drive within every business. The aim is to grow your portfolio of the most profitable types of customer, increase your share of the most profitable product categories, and migrate buyers to the most profitable products within those categories. There are various strategies for delivering each of those three shifts, for an example of the customer angle see here, but key to all of them is data – who are your most profitable customers, which are your most profitable categories and, within them, which are the products you would like more customers to choose?
Beyond those four immediate levers, there are longer-term, potentially more transformational routes to rebuilding margins, including cost engineering, partnering and outsourcing, and shifting your commercial model. The latter might mean moving from selling to leasing, from transactions to subscriptions, or developing ancillary income streams at much higher margins – like the low-cost airline example here.
What’s critical in all of this, is defining which, out of all those possibilities, is most likely to work for your business, then gathering the data and creating the insights that will tell you for certain which levers you should pull, where, and how hard. Like most things in business, the execution won’t be easy, but there’s no reason the decisions have to be hard. Work out what you need to know, gather the information, make the call, then get on with it. It really is that simple.