Improving Profitability: Margins
In this article, we look at margins: the second area to improving profitability.
Margin is the profit that you’re making on the products you sell. Everyone is selling products; whether that’s time, materials or something else. We’re going to look at the profit you’re making on these items.
Firstly it’s not ‘beating up suppliers’
Before we start, we’re not suggesting that you look at “Beating up suppliers” to get the best price – this can lead them to not want to deal with you. I saw an example of this when I worked for a large corporate company. We had a new client that wanted to make a very large purchase from us; the product department and the credit departments got very excited, then they asked my opinion … now, I knew this customer personally; I knew that he was a pain in the neck to deal with and that, more than likely, the other suppliers of similar products to ours would have already turned him down. So I spoke to the product department and, rather than actually giving him a discount, they inflated the prices on their list and the customer took the deal anyway. The customer lived up to his reputation and was a pain in the neck to deal with; when he came back to do another deal, he was actually refused. The moral of the story is: always have good relationships with suppliers.
Say “yes” to good relationships with suppliers
An example of a good relationship with a supplier comes from when I worked for a large stationery company. We were getting to the end of a quarter and looking at our figures with a particular supplier as to whether we’d hit a small rebate target. When I looked at the rebates I noticed that they jumped substantially if we did a bulk purchase; so we worked with the supplier and our bank and purchased six months’ worth of stock. This resulted in adding $100,000 to our bottom line. Then in six months’ time we were able to repeat the order and ended up making $200,000 as a result, simply by working with our supplier and working better with them.
How do we increase our margin?
- Discounts – the first thing we should be asking is ‘are we taking advantage of any discounts that are out there? Is the supplier saying that if we purchase 100 of an item that we will receive a discount? Is that achievable? Don’t just go out and buy a tonne of stuff and then face the problem of where to store it and what the holding cost of it is. The amount you save needs to be greater than the cost of having those goods in storage or the risk of obsolescence.
- Deals – next, are the suppliers negotiating deals at the end of the month? Are they trying to clear excess stock? Excess stock is fantastic, particularly if the product is still current. Are they selling off old stock? Old stock can still be viable if the product is desirable by your customers and if the price is right.
- Supplier goals – by listening to the salesperson you deal with, you could possibly benefit from helping them attain their sales goals.
- Other incentives – look past the cash price of the product you’re purchasing, there could be some rebates or free products behind the scenes which make the sale price more profitable. Other incentives could include advertising benefits.
- Substitutes – sometimes products can be substituted for other lower cost products to allow you to increase your margins. Remember though, you’re not doing this to rip your customer off. They need to be getting the same or equivalent product that meets their needs. For example, if you’re selling printer cartridges or toners, you can supply compatible cartridges in place of the original equipment manufacturer cartridges, but you need to let the customer know that you’re going to supply them and they need to be of equivalent quality.
- The Number of suppliers you have – having fewer suppliers to manage and follow up can make a difference in terms of administration and management time. It also challenges your suppliers to encourage them to make sure that they’re still supplying you with the right product at the right price.
Ultimately you need to remember that you need to look after your customer first. Make sure you supply a quality product to them and that way you’re going to have a long-term relationship with them and they know that they are getting a product that is good value to them. In return, they will buy from you again or recommend you to others.
If you have any questions about improving your margins, please contact us.