Running a business can feel like walking a high wire: What combination of costs and price puts your business on the best footing?
Because cutting prices can boost sales, some consider it the best path to profits. But, there’s a hitch: One cannot continually cut prices and expect to stay in business.
So, what are some creative strategies that can achieve that win-win of giving the customer a better price, while also keeping the company profitable? There are a few different ways to do it:
1. Reexamine your spending. Remember, profit is calculated by subtracting expenses from income. If you want to keep profit high while bringing in less money, the solution is to also cut your costs.
That might seem obvious, but startup guru Mike Michalowicz notes that he sees most entrepreneurs get more excited about spending rather than saving. His advice? A mental shift. Rather than try to achieve more with more resources, Michalowicz suggests thinking about how to achieve more with less.
Costs aren’t just about what it takes to build the product. Think through the ancillary costs of doing business: internet, phone, cable, credit card fees, utilities, administrative costs, and more.
Most of those expenses are billed in monthly costs, which can be deceiving. Ever notice how cable channels advertise products for a year of payments at $39.99 per month? A good way to understand the true cost of monthly expenses is to multiply them by 12. Across a year, that premium cable package might not seem so cheap.
2. Boost your buying power. The reason larger vendors are usually less expensive than their smaller peers? Volume. Large companies enjoy cost advantages because they can command greater leverage from vendors.
Small businesses can get a similar boost by working with a group purchasing organization. A GPO uses the collective buying power of its members to leverage greater bulk discounts from supplying companies.
Think of a GPO like a Costco or Sam’s Club. Because those corporations buy and sell in bulk, they’re able to pass on the discounts to their customers. GPOs can help small companies get the same supplies for less money, allowing them to cut the shelf price and keep the profit margin.
3. Be vigilant about vendor costs. Business owners have to deal with a lot of commodities. Not only do dozens of vendors take more time to manage, but they also tend to be more expensive than the alternative, purchasing everything from a couple of vendors.
Beware, though, that just because a certain vendor has everything you need doesn’t mean that vendor is the one to go with. Vendors are in business for themselves, and they, too, will increase prices. That can lead to a trap.
Don’t be afraid to start the bidding process all over again. If your trusted vendor really is worth keeping, it’ll show when you ask for a fresh proposal.
4. Get savvy on shipping. When you bring a package to UPS or FedEx, you see them put it on a scale. But, what you might not realize is that shipping costs are determined by the size of the package as much as the weight.
Look for ways to shrink the “dimensional weight.” Reducing a box’s height by inches can save a significant amount of money on shipping.
One way to do that is to minimize excess materials. Worried about breakage, many companies overfill their boxes with packing peanuts or other padding. But, unless the box contains breakable items, such as glass or sensitive electronics, it may be more cost-effective to eat the expense of a couple of damaged boxes.
5. Improve inventory management. At retail companies, inventory management involves a lot of work. It also, however, offers a lot of opportunities to cut costs.
Purchasing only the items you actually need is key. Evaluate inventory levels not just by product, but also by usage rate. Over the span of two or three months, calculate the average time between orders. Be sure to build in a safety margin of 10% to ensure that no one is left shorthanded.
Think, too, about where you place items on your shelves. Store brands and specialty items generally carry higher profit margins than those by major brands. Moving major brands out of the prime shelf position may result in more profitable sales.
Nielsen data shows that products placed slightly below eye level, or at waist height, tend to sell better. Simply moving one from a corner to a top shelf can boost sales by 3.4%. Placing private-label brands next to major brands can have a similar effect.
Your company’s costs may be rising, but that does not mean consumers are willing to pay more. Don’t let your profit margin slowly disappear – use these tips to keep it intact by cutting your costs.
