One of your challenges as a small/medium business owner is how to manage your profit margins in a competitive marketplace. Proper management and on-going measurement of margins is critical to your organization’s success. Competition breeds margin pressure, and companies who develop a culture emphasizing the importance of margins and their effect on profitability are the ones who not only survive but thrive.
Margin improvement is much more involved than simply raising prices or cutting costs. The process requires a structured approach to identify and analyze the multitude of variables that impact your profitability. Planning, execution and gathering data are the keys to establishing effective margin improvement programs. The following five step process will form the foundation of your company’s program.
- Engage the entire organization
- Establish a pricing grid
- Segment profitability type
- Cost containment program
- Measure results
Engage The Entire Organization
The success of your margin improvement program must have the support of everyone in your organization from top to bottom. All resources in your company impact this effort, and all should be engaged for their insight and contributions to the exercise. Experienced managers know the best ideas often come from people on the front line of the operation. You as the business owner need to establish the metrics that drives the desired performance in the margin improvement program. The key to success is effective communication to all associates in the company so they understand how their actions can positively influence the bottom line.
Establish a Pricing Grid
While pricing can be influential on margins, it needs to be carefully evaluated. You need to model baseline pricing and define related promotional, discount and markdown pricing variables. Using pricing models you can estimate how customer behavior changes with corresponding changes in price. The pricing grid is then used by the sales team for uniformity. Any requests for deviations on a customer specific basis require the approval of a designated executive. The pricing grid is developed to produce a desired margin as defined in the next step.
Segment Profitability Type
You must first start by defining your target margin. Applying the pricing grid developed earlier you can segment your data into the following elements of profitability to evaluate each one for improvement;
Data under each element needs to be analyzed to establish the proper mix in order to yield the desired overall profit margin.
Cost Containment Program
Cost containment programs can address several areas throughout the supply chain. They can address internal human resources, improvements in efficiency and/or waste, establishing a strategic sourcing program to leverage your company’s purchasing power and improvement in overall negotiation of contracts. In all cases accurate and timely data plays an important part in developing an effective program.
Margin improvement doesn’t end with the analysis and implementation done in the prior steps. An effective long-term program must include measurement of results against plan and ensure any deviations are analyzed and corrected. To achieve this result you need to appoint someone in your organization to be responsible for continuous margin improvement that is authorized to act and is accountable to you as the business owner.
Does your company have the proper culture and structure to implement a margin improvement program? If not you are putting your business at risk to your competitors who do.