What business isn’t interested in profit? None I can think of – even non-profit businesses need to be concerned about whether they’ll come out “a wash”. I find that the key to success isn’t to think about profit but instead to think about profit drivers. Not all businesses are the same. Which profit drivers matter in your business?
#1) Customer pricing – Of course, customer pricing is always important; however, in a business which is largely devoid of cost reduction opportunities, success will boil down to volume or pricing. Can you add value to your products and services and raise prices?
#2) Volume – There are some businesses which are highly dependent on volume. For example, paper mills lose significant money when down. Thus, keeping volumes up to cover fixed costs is essential. Even in less extreme examples, it might make sense to reduce prices for certain key customers which will take you past the break-even point. Contribution margin thinking was one of the keys to success in a healthcare products manufacturer’s turnaround.
#3) Raw material cost – I used to run operations for a business with a raw material cost driver. It was 70% of product cost; thus, not only purchase price mattered but also product design, scrap etc. Even though the Board of Directors was suspect of hiring when we didn’t have money, we had to bring on the right talent to address raw material cost to succeed. Invest $1 to save $1000!
#4) Labor cost – Those products with a high labor cost component have likely been outsourced to China, Mexico or another low-labor cost spot. Unless the product is also bulky (leading to high transportation cost) or strategic from a value-add perspective, it wouldn’t be competitive to leave in high labor cost areas.
#5) Service – Are your customers willing to pay for exceptional service (Mercedes, Lexus) and/or rapid delivery (expedite fees)? There are businesses based on these types of factors that drive success – just think of any of the high end brands. Who needs to pay $1000 for a writing utensil (Mont Blanc pen)?