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Priorities for Maximising Profit!

Maximise selling price:- too many entrepreneurs shy away from ensuring their prices are the optimum they can achieve. All too often in the pressure of propping up turnover, discounts emerge as the perceived solution.  However, maximising price creates the highest efficiency by getting the maximum revenue for the minimum effort.  Maximising selling price is not just about what's on the price tag, but how the product or service is positioned and targeted in the marketplace. A very ordinary product can command an exceptionally high price if marketed, packaged, and sold in environment that is perceived by the buyer as good value for money.   In the consumer market, raising prices by 1-3% is not normally a deterrent for somebody to buy if everything else associated with the purchase remains excellent.  However, by considering the ability to reposition the product in the market one can achieve price increases of 20 to 60%!  Look carefully at your product range and see if it has the potential to be repositioned.

 Table showing the potential impact of price increase on volume

Lower cost of sales:-  this area is often overlooked, yet one can experience significant gross margin erosion through cumulative small cost increases from suppliers, wages, carriage, packaging and the like.  Management accounts can be invaluable in providing visibility of this substantial cost area.  Regular reviews of suppliers and other costs can help identify the elements to be scrutinised in detail. Again it is not just the price tag, but the total cost of acquisition that matters.  This should drive the consideration of outsourcing, bringing in-house, changing supplier, manufacturing methods, materials and logistics as well as streamlining processes. 

Product profitability:- it is surprisingly rare to find an organisation that monitors product, service or contract profitability.  A periodic review can be extremely revealing.  Again it is essential to consider the total cost of getting the product to the buyer, not just the cost and selling prices.  There is little point in consuming the organisation's resources to peddle unprofitable products.  It would be more effective if the same time was devoted to the more profitable products and/or finding substitute products.  

 Boston Box – Product strategies

Increased volume:-  this is generally the area most focused on it in terms of resources, yet this is only third in the profitability building league table.  For volume     growth it is worth using Ansoff’s matrix as a means of considering a strategy of how best to grow business volume.                    

Ansoff’s Matrix – Growth strategies

Lower overheads:- this should always be the last resort, as its consequences generally weaken the organisation's infrastructure, and thus its ability to function effectively.  This should not be a knee-jerk reaction but a very measured consequence of a careful analysis of all the activities that constitute the organisation's overheads. Ideally one should be looking for the means to maintain the organisation's effectiveness at reduced cost. Perhaps through process streamlining, alternative methods of working, outsourcing, bringing in-house or renegotiating pricing and contracts. 

Lowering prices:- this option should not be considered under any circumstances except for the very occasional “one off” special deals that are certain to lead to full price trading very quickly.   Price cutting can create a chain reaction from which it is very difficult to recover.  Competition will generally respond equally aggressively and very quickly sources become overstretched trying to deal with increased volumes was profitability has almost certainly been undermined.

 Table showing impact of price cutting on gross margin.

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