The ability to create greater profit is probably the most emotive subject for all business owners. We all want to make more money in our businesses, reducing the need for investment when doing so. Generating more cash in the business can come from improvements within cash flow but, as business owners, we rarely look at the incremental changes we can make to positively affect margins, and ultimately profit.
We look at systemising our businesses and operations to save time and make us more productive which will impact on our capacity to do more; this gives us the opportunity to create more profits based on how we perform or be more productive. Margins, however, have a direct correlation with the cost of sales, what that cost is and for how much we can sell our products and services. This is something that is greatly undervalued and overlooked and part of an ethos in working smarter rather than harder. If we can maximise margins through incremental savings on costs, along with incremental increases in the value of the sale, the widening of this gap can have a very positive influence on our businesses.
There are two traits I have noted throughout my coaching life and both carry significant weight when looking at the ability to increase margins.
The increase in ‘stealth’ costs:
When studying a set of accounts, you can always find opportunities to save cost. Every business, over a period of time, loses an element of control over cost. You have the typical areas that directly impact on costs including wage increases, increases in external charges for services and software, equipment, infrastructure, taxes… and the list goes on! Some of this we can control, some we can’t, and before we know it our margins are being eroded away. We very often don’t represent these increases within our sales price. Accompany this with poor cash flow and it is very easy to see why businesses can very quickly run out of cash.
The other aspect of what I would call ‘margin deflation’ is down to market forces. When economic conditions become more difficult competition can become fierce and it is very easy for the future customer to dismiss the value in a service or product in favour of a cheaper option. However, in most cases, this is more down to the fact the value of the service or product is not communicated effectively to the customer. The necessary marketing and sales processes can help to demonstrate value, creating a persuasive argument for the customer to spend more. This leads very nicely onto the value of your service and product…
Maximising the value of the sale
When margins are being squeezed the answer has to be two-fold. Look at the cost of the sale but, importantly, look at the value of what you are selling. Probably, the biggest trait I see in coaching is the undervaluing of the services and products being sold. Some would say there is a market price for everything but the reality is that the services and products we all purchase in our business and private lives vary dramatically. It is down to the perceived value of what we are purchasing. We will choose brands over other brands because the positive perception around that brand makes us spend more. It could be down to quality, trust and reliability. In most cases we choose brands that are trusted over those that aren’t and don’t perceive a spend of this nature as an over spend; we are just buying what we deem is the best value. A purchase that will create the right result or outcome!
Value proposition – how can we add the value!
As I mentioned earlier, the common mistake is not to communicate the value of your proposition. What makes your product or service better than the rest? What methods do you adopt to communicate this fact? How do you acquire third party endorsement to prove this fact?
The last question is absolutely key in a business and consumer market that demands reviews and endorsement. If you look into statistics you will find the most reviewed contact is in fact the reviews themselves. Whether you trade in a B2B or B2C market, we all look for clarification from others. The buyer in a procurement department isn’t instructed to buy the cheapest, they are looking for the best value. In many cases they are looking to see who they can trust to deliver the best result. Cheaper could mean more inferior or, if service based, less effective. They look at the result and, if you can prove the result (the outcome they want) through endorsements, you are very quickly demonstrating the value in your service or product choice – adding value to your proposition!
An example for you…
When looking at the value of your products and services, look at one of the largest brands we know today. It sells to businesses and the consumer. It is the largest business of its kind globally, having risen from the depths of near bankruptcy to become the most desired brand within its numerous market places. Apple computers sell products like no other business. Most computer companies don’t have the ability to diversify their products ranges to compete with Apple. Apple sell probably the most expensive alternatives in every market they trade in but they have created desire around their products. Buying an Apple device of any kind is an experience from the moment you receive the package through to the longevity of how long you keep that device. Cheaper computers do all the same things and have the same technology and invariably cost half the price. Globally, we buy Apple products because we perceive them to be of better quality the rest, more reliable, more trusted and ultimately more desirable. Those words again… quality, trust, reliability and, of course, desirable to the masses.
Taking the lead from Apple
As a business owner who trades in a local or niche market, you may look at this example of Apple to be extremely far removed from your own business but, in actual fact, it is a perfect model for any business. Showing the value, or adding the value to your business proposition, getting others to endorse what you do and demonstrating to that new prospective customer the reasons why they should choose you over the competition, is extremely important. This mentality is relative to any market place and for any business.
What is the outcome?
Creating the desire in your offering is extremely important. Imparting information that differentiates you from competitors positively demonstrates the value and reasons why, as business owners, you don’t just need to look at costs to widen the margins you make, you firstly need to look at the value of what you sell. Demonstrate that value and get others talking about why they find what you sell more valuable.
If you believe you aren’t achieving the value in your offering, or indeed you want to widen that gap between cost and sales price, it is something I focus on greatly when working with clients. Incremental improvements through cost efficiencies and realising the value of your proposition can have a major impact on your profitability. Accompanying this with improvements in cash flow, productivity and operations, you can very quickly experience significant improvements within your business.