Improve Your Margin

In the business world revenue is important, but then so are expenses, free cash, managing receivables and a whole lot of variables that affect your bottom line. One good quick handy measure of how you are doing is gross margin. Basically it is just the difference between your revenue and expenses.

It’s a little easier to keep track of these core elements if you have a physical product. If your product is software, then your major expenses are just time. How long does it take to “build” new software features and test them, get feedback with a beta release of the product, etc.

Regardless of your product type, a common and effective tool is to reverse engineer several samples of competitor’s products. This will give you some idea of how they think about their product. How do they handle updates? Are there some obvious weak spots? Are they using materials that are at an appropriate quality level based on how the product is supposed to perform? Making these comparisons with your own product can start the creative juices flowing. Maybe you can exploit some known weaknesses, or find a better workflow by seeing a different solution. Often, with physical products, you can show a product idea to a fabricator and they can advise you on ways to design certain parts so they are less costly to produce.

The purpose in doing this exercise should be focused on eliminating the cost and improving the margin, whether by increasing revenue or reducing expenses. One opportunity that people wrestle with is older people in the workforce. With people living healthy lives for a longer period of time, you may find some workers who are not ready to retire, but wouldn’t mind working four days a week so they can enjoy longer weekends. In fact, many companies have successfully moved to a four day workweek for all, saving a significant cost for overhead.

If your company can get good at assessing opportunities to improve margin, you can formalize the process through training in some of the six sigma practices which have a proven track record within the industry. Under those principles, there are a lot of time and money saving practices that can easily be incorporated into your design and manufacturing processes, or delivery of services as the case may be.

One note of caution - this may be self-evident, but a myopic view of cutting expenses without a review of potential negative impacts to the customer is a dangerous game. If you’ve built your reputation on customer service and you make changes that result in poor customer service, obviously you may damage your reputation and even lose customers. The work of improving margins must be undertaken with an eye towards long-term results.

Ideally you want to take this mindset to the organization. Not only will you improve margins over time, it helps everyone understand that it is a core function of business. It sends a message that they are empowered to participate. Best of all they get credit for their participation and the satisfaction of helping to grow the business.