Essentially there are only three (3) ways to increase profits:
- Increase the price you charge for your products/services and maintain sales volume
- Increase the sales of your product/service at the same cost per unit
- Reduce your costs
The first solution is often not possible due to competitors whose strategy is to be the high volume/low-cost provider of your product/service (think Wal-Mart). While this plan may be able to work in certain markets or even universally during the short-term, it is not a sustainable long-term solution, as competitors will be drawn in by your high margin returns. Finally, unless you are offering a niche or luxury product, higher prices per unit usually result in decreased overall sales volumes; not only failing to increase profits, those trying this strategy often see bottom line profits actually decrease.
If increasing sales were as simple as “wishing for it” then the solution would be simple and everyone would increase profits continuously! Sadly, even if possible, even that would eventually lead to market saturation, resulting in decreased demand, yielding an infeasible long-term strategy. Achieving a consistent increase in sales usually requires increased costs (more reps, more advertising, more warehouse/office/manufacturing space or additional commissions/bonuses to your sales staff), meaning that even an increase in sales does not guarantee an increase in profitability.
Reducing costs also comes with its own set of challenges, but it is the most achievable and sustainable of the solutions. This is especially true if cost reduction efforts are practiced internally and coupled with oversight by independent auditors or consultants with spend-specific expertise. Ironically, the biggest challenges to cost reduction are internal. There are the challenges of limited internal expertise, lack of initiative (‘it’s not my money”) and Decision Makers being blinded by vendor loyalty. There is also the challenge of overcoming the egos and fears of employees; overcoming the thought that “we do this internally”, “we have already looked at that area”, or the fear of retribution by Management of substantial savings actually being found by an outsourced organization. There are challenges of companies who lack formal Procurement and Payable Policies and those with Policies in place but who lack in the inspection of Policy adherence.
Working with an outside firm, which specializes in cost reduction, can help your team work through whatever the challenges may be within your company to increase the cost reductions that are available. Cost reduction is not only the most sustainable solution to your goal of increased long-term profitability; it is the only option where external market forces do not determine the outcome of your efforts.
[author_bio username=”Ken” name=”yes”]