As you may know from Simplified Strategic Planning, we tend to counsel companies to pursue either the low cost/price strategy (think Henry Ford or Sam Walton) or one of the two specialty strategies, differentiation or niche strategies. All three are good, but we tend to favor the specialty strategies because the profit margins are higher. This interest in margins is not just because we like making money – though we do. It’s also because margins give us strategic flexibility. You can keep your profit, of course, but you can also invest it in growth, employees and product improvements. Strategically invested, these things can reduce the negative impacts of competitive moves, environmental pressures and other assumption errors.
The high margin strategy has some basic ground rules that are worth examining.
Charge what your product/service is worth, not what it costs
This is a tough one for many, because we usually can know our costs better than anything else. You really have to look at the market from the customer’s perspective to see the value, and that means knowing what their choices are and what value the differences you provide add to the customer’s perception of value. If you are a manufacturer, it means getting away from thinking in terms of pounds of raw material (for example), and if you are in a service business, you must let go of thinking in terms of hours. Commodity buyers think this way and want to think this way. Your commodity competitors also want you to think this way. This thinking is the opposite of selling a package, a system, an experience or a solution. You must sell a lot more of anything to turn a profit selling by the pound or hour.
Prioritize adding real value over reducing costs
Many of us learn cost accounting as a part of our management training. Costs are easy to focus on, because they are measurable. It’s hard to measure how much more an Apple product or a vacation at Disney World is worth. When we examine investments of time or money, we often prioritize things that give us measurable payback, and that drives cost-oriented behavior. Make sure you remember that the high-margin customer is always looking for something beyond the price – and failure to deliver that will cost you the customer.
Let the price driven customer go to your competitors
One of the hardest things to do is let go of customers. A tiny bit of thought will remind you that no company can be the best for all customers. Trying to be the best for all customers will make you second best for everyone. This means you must let some customers go to your competition – and strategically choose the low-margin customers as the ones you lose will improve your profitability. Let your competitors have those headaches – your strategic choice is going after customers who are a headache because they are more demanding, rather than cheap.
Don’t allow customers to have any reasons not to like your product/service
One of the toughest things to understand is that you may have to spend real effort – both time and money – making your product/service truly the best. It may increase the price. It may decrease your margins (temporarily). But the best price doesn’t go to the second-best product, in most situations. You will have to earn those margins by understanding what’s truly important to customers, even when they may not know themselves.
We’ve found that companies that follow these four rules get higher prices for their products/services, and command real loyalty from the higher margin customers.
If you’d like help understanding how to make these rules work to build margins for your company, get in touch and we’ll help you lay out a terrific map to success in doing so. Consider holding a one-day workshop on Simplified Strategic Planning.
M. Dana Baldwin is Senior Strategist with Center for Simplified Strategic Planning, Inc. He can be reached by email at: firstname.lastname@example.org