“Too often in business we get trapped into equating sales with profits. Yet there are many other ways you can dramatically impact your profitability!”
Underpricing Kills Profits!
Many small businesses have thinner profit margins than larger firms because they tend to underprice their products or services. So why not just raise prices? I know the feeling—you’re scared that your competition might swoop in like a bird of prey and your customer base might shrivel overnight!
For years we credited much of the success of our best-selling resume book, Resumes That Knock ’em Dead, to its relatively low $7.95 price.
My sales manager insisted we could charge more, so when we brought out a new edition, I nervously increased the price by 25 percent to $9.95. What happened to sales? Unit sales surged more than 20 percent. Total revenue soared 50 percent, and profits skyrocketed! Still unsure about raising prices? Remember, you can always cut them back. A Chinese restaurant I eat at has rolled the price of its lunch buffet back and forth like a Ping-Pong ball, between $5.95 and $6.25, four times over the last two years.
Is the Marketing Working?
You’ve probably heard the familiar maxim: “Twenty percent of my advertising brings in 80 percent of my business, but I don’t know which 20 percent!” Well, I bet that in your business there is at least one marketing expense that you have a strong suspicion isn’t carrying its weight—so cut it and see what happens!
One year, I tried cutting three-quarters of the promotional budget for my leading book. What happened? The sales continued to creep upward, and the profit margin of the entire company jumped markedly higher.
It’s often by eliminating the marketing expenses previously considered most sacred that you gain the most. For example, for many years when I was in the book industry, the annual trade show—considered the launch platform for the important Fall selling season—took on ever increasing importance for almost all book publishers. They would fly in dozens if not hundreds of people, erect massive custom-engineered trade show displays, and throw lavish dinners and parties. The expenses ran into the millions. The show went beyond being a marketing event into boastful grandstanding of each publisher’s might and position in the industry.
But suddenly a couple of big publishers decided enough was enough; they couldn’t possibly justify the huge amounts of money they were spending on the show. Soon, others followed suit, and some stopped going entirely. Guess what? Their sales didn’t suddenly evaporate! The industry had changed, and with so much power having switched to a few powerful bookstore chains, making an uber showy and expensive splash at the annual trade show was no longer so important.
The Easiest Way to Profits
Let’s say your overall profit margin is 5 percent—not an uncommon level for many smaller firms. But if you can cut your costs by just 5 percent, your profit will approximately double. On the other hand, to get the same increase by boosting sales, you would have to increase sales by 100 percent. Chances are that cutting costs just a little bit would be a lot easier.
To attack your costs, take a look at every single expense item, starting with the biggest ones. Get competitive bids for every product and every service that you buy. Remember, despite what they may teach you at business school, there is no such thing as fixed costs. Often lease rates, mortgage rates, and utility rates can be negotiated downward, especially if the market has shifted.
Review Your Product Mix
A seasoned banker once told me about a firm with several highly profitable divisions and one marginally profitable division. The company sold the marginally profitable division, and suddenly the performance of the remaining divisions dramatically improved.
I’ve tried this—and it works. When the economy around Boston hit rock bottom in the late 1980s, I closed my job-advertising newspaper, which was 50 percent of our revenue the previous year. I was able to put all of my energy into the other part of my business—book publishing—and it took off: revenue doubled, more than making up for the newspaper closing.
Even a marginal business or product line that isn’t losing money is draining resources such as time and focus. Close it and move on!
One of the battle cries in business today is to determine the one thing that your business does best, become even better at it, and outsource absolutely everything else. There is certainly a lot to be said for taking a careful look at every function in your business and asking yourself whether you should outsource it.
But take a hard look at the numbers before you decide to jump on the outsource bandwagon. For example, we hoped that by outsourcing the warehousing of our books to our printer in the Midwest we could save lots of money in freight costs. But a careful analysis showed that we would save almost nothing in freight costs and that outsourcing would have nearly doubled our warehouse and handling costs.
Takeaways You Can Use
- Don’t price too low.
- Quickly drop any marketing that isn’t working.
- Slight cuts to overhead can send profits soaring.
- Focus on the most profitable products.