Almost every business will experience a rise in costs somewhere along their supply chain: raw materials, transportation, wages, and more. Between these rising costs and growing competition, many businesses are experiencing significant margin pressure, which is eroding profits. So what should businesses be doing to avoid margin pressure? Here are three strategies to consider.
1. Value pricing
The answer to shrinking margins is not to discount prices under the assumption that this will trigger the necessary increase in sales to make up the difference. Therefore the trick is to provide customers compelling reason to focus on something other than price; namely value. Value can take numerous shapes and forms – for an insurance company it could be their claim payment reputation, Hyundai was able to gain a good foothold in the car market some years ago by offering a superior warranty, and for Xero it’s ironically the software’s simplicity. In a lot go cases nailing the value component means the customers will likely even tolerate an increase in price.
2. Smart investment in technology
Smart use of technology can help a business achieve more with less, which drives productivity gains and lowers the cost of doing business. Lower cost-of-goods sold translates into better margins. The latest plastic injection molding equipment may offer a higher production run, result in less wastage, and require less human supervision. Collaborative technologies can help improve workflow, and job visibility and encourage cross-functional working. Implementing route planning software has considerably reduced the distance traveled by UPS courier drivers, which means less fuel, less CO2 emissions, and less vehicle wear and tear.
3. Working capital management
Yes, better management of working capital can provide an opportunity to improve margins. Unfortunately, in many businesses working capital is not factored into decisions made outside of the finance function. These departments therefore don’t realise the cost associated with maintaining high inventory levels or the impact of slow, inaccurate invoicing. Not only do they not know the true cost of doing business, they have no idea if their department is generating cash or burning through it.
In the past, businesses have taken a very reactive approach to relieve margin pressure. Today’s businesses need to adopt a holistic approach to margin management in order to maintain long-term success. At the end of the day, margin erodes profits and shareholder value, so it is the responsibility of the governing body to ensure the business is protected and the necessary strategies are in place.
