Whether you are a mom and pop store or a Fortune 10 company, you have revenues and you have costs of goods sold (COGS). Managing these costs can be the make or break for many businesses. Sales aren't easy and they aren't on demand, but managing costs and pricing can be both.
So what exactly can a business do to manage costs?
- Re-negotiate supplier pricing
- Invest in higher efficiency equipment
- Streamline production or ordering processes
- Change suppliers or product/service offering
- Plan larger orders to take advantage of bulk shipping and/or purchase pricing
- Set order limits to customers to limit costly small quantity shipping
The list of options goes on and on.
Let's look at an example of the numbers for two companies in a realistic setting.
Framing The Situation
Let's say that a nameless bar and grill restaurant is selling a pizza for $15.90; we'll start there. First let's review some important price assumptions:
- If the seller of the pizza has applied a Keystone Pricing Model to their food sales, each pizza costs them $7.95 from purchase to sale. (50% Gross Margin)
- If our mystery company's distributor is selling pizzas at $7.28 and they are utilizing a 30% markup, the distributor's cost/pizza is $5.60. (23.08% Gross Margin)
- If the distributor can cut their cost per pizza by $0.05, or 0.89% of their current sell price, they've increased their margin by almost 3% on each pizza (23.08% vs 23.76%).
Let's say the distributor services 60 sellers totaling $500,000 of gross pizza sales/year. That is a $3,434/year increase in gross profit for the distributor.
For the pizza seller to achieve the same 3% more margin as described for the distributor, they need to cut their COGS by roughly $0.235, or 1.48% of their current sell price.
If the seller is doing $36,000 in yearly pizza sales, they'll see a $532 increase in gross profit by cutting their pizza expenses as suggested above.
The Big Picture
If you don't know your numbers, you don't know your business.
One of the hardest parts of trying to increase profitability is understanding where to focus. People commonly want to jump headfirst into more sales because that's what everyone talks about, sales and revenue. This is especially true when a business is failing.
By managing and planning costs you can drive profitability in a more sustainable manner. An increase in sales doesn't necessarily create profitability, but managing the costs of your sales can.
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Article Source: EzineArticles.com/expert/John_Becker/2455173
Article Source: EzineArticles.com/9778335
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