How are your margins?

Thursday, February 11, 2010, 10:07am PST
Puget Sound Business Journal (Seattle)
WSU survey: Half of Seattle businesses sell below cost
In an effort to stay in business, half of Seattle business executives said in a new survey that they’re selling their products below their costs. According to a survey by Washington State University and the Seattle Executives Association, in the last quarter, 70 percent of those surveyed said they believe their competitors were selling items below their costs to stay in business.
The survey of 103 business executives indicated that their companies’ sales, inventory, financing and employment were all “stagnant to declining” but there was optimism because “more respondents were positive about key economic indicators than negative.”
“These conditions underscore the need for business to analyze profit in addition to costs to identify where their comparative advantages lie,” said Justin Taylor, economic impact analyst at WSU, in a statement.

Wow, that’s a very interesting blurb that appeared a week ago. From this article it sure appears that many businesses have little to no gross profit margin. I hope they have a lot of cash on hand because that’s what they’ll need if they hope to be around in a few months. It doesn’t take long for the cash to run out when the selling price is at or below cost.

What can you do about this? There are many actions you can take but I’ll just offer one for your consideration. Do a study of your current customer base using market segmentation. This will allow you to categorize your customer base by various demographics and psychographics, and thus analyze the estimated and actual selling margins. In addition, when doing the analysis, consider the background overhead costs that your organization incurs in selling, producing and delivering the product or service. Sometimes you can get fooled into thinking a particular customer is great, but behind the scenes they take a lot more work and cause internal hassle.

So, look for the customer types where you truly get the best ROI on your total efforts. Pick the top two types as you’ve defined them and develop a marketing plan to go after more of this business. If more of this business is not in your direct marketing area (location wise), consider how you can develop customers outside of your area and whether it still makes sense to go after that business.

By using a bulls-eye focused approach to a specific market segment, one that you now know has better margins for your business, you will be using your organizational strengths and expertise better and your margins should improve.

I’ve done this and seen revenues and margins improve significantly. Here’s an example (rounded #s):
Business revenues: $15.0mil
Overall GM% and $: 30% = $4.5mil
Current Business Top Two Segments revenues: $8mil @ 35% = $2.8mil
Current Business Other Segments revenues : $7mil @ 24% = 1.7mil
10% growth of Current Business Top Two, now targeted with your plan: $8.8mil @ 35% = $3.1mil
Increase in GM$ = $300K

I don’t know any business owner who wouldn’t want at least $300K additional brought into the business. And, it could be much more. Your business may be able to grow the top two segments more than 10% because this is what you are really good at- it’s your sweet spot. Remember, you’ve got to take the time to do the analysis and build your plan. You cannot do this halfway.

Oh, one last thing- coming soon, maybe over this weekend, I’ll be posting an audio sound bite on my blog where you can hear a bit more about what I can do for businesses.

© 2010 Peter E. McDowell
Pete’s View
Interim/Contract or Permanent Executive Management Services
Sales Focused Business Strategies – Business Strategic Planning – Business Best Practices
pete@performabusdev.com

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