When Does the Foundation Become an Anchor?

The very products and services upon which you built your business may be keeping you from increasing your company's profits.  This transition from foundation of success to anchor is gradual.  What should show up as changing consumer preferences are often overlooked simply because you are not getting the information you need to spot these trends in their early stages.

The companies that identify changing trends early and redirect their efforts accordingly normally experience two advantages over their competitors, (1) they achieve higher margins because demand outstrips supply and (2) they gain market share from their competitors.

Let's look at how most businesses respond if they aren't one of the early arrivals.  First they spend more money on marketing trying to retain market share, but it doesn't work. .  Their next response is to lower prices.  Now, the company is spending more on marketing to get sales at lower prices.  Profits take the old one-two punch,  (1) on higher marketing costs and (2) lower profits from reduced prices.  It doesn't take a rocket scientist to see how great the advantage is to those who monitor changing trends.  What, then, should we be monitoring?

PROFITABILITY AND MIX

Here are a few of the items you should monitor:

• Profitability by product line or service category

• Changes in the mix of products/services the customers purchase

• Profitability of each of your customers

• Changes in profitability and sales mix of the various regions served

• The size of the overall market for your offerings

Unfortunately, too few businesses have the systems necessary to provide this information.  It is even more unfortunate when you consider the wide array of reasonably priced software packages that allow you to have this information at your fingertips 24 hours a day.  But access to information isn't enough.  You need to combine these financial statistics with customer meetings specifically designed to identify not only their needs, but THEIR customer's needs as well.

MISSED OPPORTUNITIES

All too often business owners bemoan the fact that they had an opportunity for new business but they didn't have the production capacity or financial resources available to take advantage of that opportunity.  Here's a way to avoid that dilemma!

If you know how profitable each of your current offerings are and a new product comes along with better profit potential, you can eliminate a low-margin line and add the new, higher-margin offering.

Similarly, you can replace a low-margin customer (normally they are also the most demanding and least fun to work with) with customers whose purchase mix include more of your high-margin items.  In both instances, profit improvement comes with minimal investment in production capacity and little, if any, increase in overhead costs.  Usually these changes in your business do not require new funding; they can be financed through current operations.

Don't let your foundation become an anchor!  Monitor and adapt to changing the changing profitability of your offerings and customers.  Then reap tremendous rewards with little, if any, new financial commitment.

Copyright © 1997, Dale Furtwengler, all rights reserved