Since starting my first book publishing business in 2005, profit margins have been under pressure. Internet retailers with relatively low overheads are selling products for less profit. Supermarkets are selling books at a loss to get customers through the door, and e-book customers are increasingly demanding for a model similar to music subscriptions, where products are available at little to no cost.
But book publishers aren’t the only ones suffering from margin pressure. Yes, customers should always be in charge, but the digital age has made them all-powerful. No longer can businesses pretend they offer the best deal in town. Customers can now view a myriad of competitor sites and product reviews within minutes, leaving companies’ profit margins under intense pressure to secure the sale. But there are ways to squeeze a few more percentage points of margin from each product you offer:
1. Deal with the incidental waste.
When our profit margins were decreasing, one of the first things we did was identify all our small, additional expenses and take back control of spending for a brief period. This wasn’t about being controlling, but identifying areas where money was possibly being wasted — stationary, postage, travel, etc. All sound minor, but together can have a negative impact.
Within two months, our spending on these smaller budget lines had reduced by more than 25 percent, and as a result, added a percentage point or two to our margins.
To do this, first look at the overall picture. Take your total monthly spending on each line item and compare it to your budget. Then, go through a fully itemized list of expenditure and mark what costs could have been reduced or not made at all. Once that’s done, calculate the difference. You may be surprised by the percentage your business could have saved.
2. Review product manufacturing.
Break down each part of the manufacturing process and related costs, and look to see where you can save. In some places, it’s worth getting quotes from competitors to move elsewhere or keep prices as competitive as possible with your current partner. Even if you have the best price, look at ways to cut costs. For instance, can savings be made by ordering in bulk? Is there anything that can be changed in the specification to reduce cost without compromising quality? Can the delivery costs be reduced if handled differently?
3. Distinguish distribution costs.
It’s easy to focus on the cost of producing your product (and how much you sell it for) while ignoring the other costs tied up in logistics, like shipping. It’s not the fault of your distributor, but rather that your logistics haven’t been properly thought through.
The key here is to separate production costs in your budget. If you lump the costs together, you’re likely going to miss out on savings. Break it down into separate lines — materials, shipping of materials, manufacturing, shipping of final product, storage of final product — and review each one.
We highlighted the cost of returning unsold stock and sending stock for smaller consignment orders that were increasing the percentage cost of sale each month.
4. Review trade pricing.
If a large chain comes knocking on your door, it’s tempting to accept whatever deal they offer. But the key is to return to them with an argument rather than a begging bowl.
You may want to consider a varying price depending on the level of promotion included in the sale and offer them exclusivity, or by including added value, give them an advantage over a competitor in return for a better deal. You could even agree to some upfront spend in return for a lower trade price. They’re not going to give anything away for free, but if you can take back a few percentage points from all retail customers, the result will be a significant positive impact on your margin.
5. Remove links in the cost chain.
Think creatively about adding some higher-margin products into your selling schedule. These are products where the cost of sale is significantly lower, thereby creating a high-profit margin. Reducing manufacturing and shipping costs, and repackaging a product where some or all of acquisition and production costs have been paid for leads to a range of higher-margin products.
There’s no one step that will double your margins overnight: It’s usually a process of shaving off percentage points. Margin saving is very often a sum of its parts and can turn a cost-burdened business into a profitable one.