Have you ever been in the situation when your profitability is trending in the wrong direction? It may have been a deep and sudden dive, but more likely a long, slow and seemingly inevitable decline.
What would your accountant say?
Usually the first thing you hear from the accountant is that you have to cut costs. So often the bean counters take the knife to advertising, deeming it an unnecessary expense that can be turned on and off. Don’t they want sales? How are customers going to find out about your offering, specials or new products if you don’t tell them. Mark Twain said “Many a small thing has been made large by the right kind of advertising.”
Or they want cut training – but of course training helps people do their jobs better, and by doing their jobs better they may cut costs by doing the job more quickly, or making less mistakes which have to be rectified. Sales training will help increase sales; customer service training will lead to happier customers. Happier customers will come back more often, and refer others, and nothing is more powerful than a referral to gain a sale.
Having said all that, there are situations where cutting costs will help arrest that profit slide. An international survey found that 14% of businesses did not know their real logistics costs. I can believe it. Many businesses fail to check these things. They just sign off on the docket. If you don’t know your real costs how can you control them. One client I had some years ago was one of those small and medium businesses who did check his logistic costs. He said that almost every freight bill he checked had an error in it.
Small expenses add up. They can derail your budget without you noticing, and before you know it Gross Profits are not enough to cover your expenses, or leave a profit. They may be ever-increasing telephone/internet costs, or unnecessary repairs and maintenance because equipment or vehicles are kept beyond their economic life.
And then there are the annual costs such as insurance or rental that so often are renewed without seeking competitive quotes each year.
So, yes, follow your accountant’s advice and cut costs, but make sure they are unnecessary costs, or the waste that can creep into a business in good times and leave you a little plump around the middle like a well-fed bureaucrat.
And then there is your Sales Team
You know what their reaction is going to be! We need more sales; you have to slash prices! I can just hear them.
Of course slashing prices is a very lazy reaction. When I was first given an opportunity to make a sale in my days in the aircraft industry I was struggling so I asked my boss if I could cut the price a little to get the sale. He just said “Anyone can sell by cutting the price.” The disgust in his voice cannot be reproduced on paper but it left me wanting to sink through a hole in the floor.
“Your price is too high” is probably the number one objection customers put forward when they are reluctant to buy. It’s convenient, it’s easy, but do they really mean it? It may well be that they can’t afford it, which doesn’t mean that your price is too high for your market, but it is too high for that prospective customer.
Price objections are a very convenient way for the prospect to step back. There can be a range of objections which have to be identified and removed. Many of them relate to uncertainty and risk; we haven’t demonstrated that our product or service will solve the prospects problem; we haven’t given social proof through testimonials and so on. Slashing prices is not necessarily the answer.
You can find out if price is really the main objection by asking them if they would buy today if the price were lower. If the answer is yes you have the opportunity to improve your offer, and that may not mean lowering the price. It may mean offering terms, a bonus, extended warranty and so on.
Often the customer is stalling; they want more time to think about the decision. Discounting the price may raise doubts about your products value when maybe you haven’t convinced them of the real value of your offering. You need to be able to identify why the customer wants a product such as yours and improve your sales message. Getting testimonials from happy customers about the real value you provide can also help.
The funny thing is that if you ask someone why they lost a sale to a competitor invariably they will say they were beaten on price, but if you ask them why they won a sale over their competitors, price is rarely given as the reason. The reason will be the quality of the product, customer service, the relationship they built with the client, the thoroughness of their quotation; anything but price.
The other thing you might regard as funny is that raising prices can actually increase sales. There have been a number of studies on this. People perceive products that have higher prices as having higher value. You reposition yourself in the market. Of course your marketing and sales message must change to reflect the changed price.
The reality is, when you look at your marketplace, there will always be someone charging more than you, and I bet they are doing well.
If you surrender to your sales team’s demand to slash prices you are both undervaluing your product, and jeopardising your profitability even more. If your products are properly priced already, then slashing prices is further cutting into your potential profits.
Why not try increasing your prices, and the easiest way is just to increase them.
America Express has had a look at this conundrum. American Express looked into 1,000 small businesses across Australia with turnover of up to $2 million. It found that 74% of respondents had taken action in the last year to “future-proof” their operations against sustained economic uncertainty.
Jason Fryer, Amex’s head of small business services said the results demonstrate there are two “fundamentally different approaches to business survival” – services versus cost-cutting. He said the survey showed that the traditional method of cost-cutting to increase profit was not the fool-proof approach.
Small businesses that focused on improving product offer and service capabilities as a measure to “future-proof” operations are more likely to have increased revenue in the past year.
Those small businesses that focused on cost-cutting as a “future-proofing” approach (40%) were more likely to see a decline in profit.
Measures taken to “future-proof” businesses varied, with 51% taking steps to reduce expenditure, 24% to improve products and services, 17% to improve cash flow, and 16% to boost marketing.
Steps taken to improve cash flow also improved profit for small businesses, the survey showed.
As discussed above, cutting costs often damages things which help the business.
As business advisor Alastair Drybugh put it “Any actions which compromise quality, damage customer service or weaken your competitive position could start a vicious circle of falling revenues, costs, further losses of revenues, and more cost cuts and so on until the end of the business.”
The businesses that survive difficult times the best are those that are well managed, have a distinctive position in the market and satisfy their customers.
So take a positive approach to a decline in profitability. There may well be areas where you can legitimately cut costs, areas where there is waste and mistakes. But don’t cut the areas that bring you sales. And don’t cut your prices. Instead, look at how you can raise them.
To your profitability.
This article was suggested by our mentor Trevor Payne