Increasing Profits: Three Guiding Rules
Increasing Profits: Three Guiding Rules
For a company that is looking to build a sustainable, profitable
business model, we believe that there are three primary rules for
increasing profits and remaining profitable.
-
Work to align the interests of all of the
companys stakeholders, including shareholders,
employees
, business
partners
, customers,
vendors
, and even the
community in which the company is located. This represents a
commitment to the principle that long-
term
business success is
built by contributing to the success of all constituencies.
-
Approach each endeavor with a strong work
ethic
. This
demonstrates
respect for the fact that nothing
replaces
hard work.
It exemplifies a belief in the old saying: The
harder I work, the luckier I get. And, as a
corollary, that good enough is never good
enough.
-
Strictly
adhere
to a consistently applied business process. In
this case, it is as simple as: make a plan, clearly communicate the
plan, monitor results, and
react
to them with changes as
necessary.
When seeking to increase profits by a certain percentage and
within a specific time range, there are two options: raise prices
or reduce expenses.
Raising Prices: Simple and Effective
Because of the proprietary (protected by substantial
intellectual property) nature of our products, we have been able to
raise prices successfully on several occasions. Having a business
model that concentrates on innovative products protected by patents
and trademarks allows for substantially more pricing flexibility
than dealing in commodity categories which are highly competitive.
Ideally, pricing should be based on the utility of the product
rather than tightly tied to the cost-of-goods sold. In this regard,
one can find
numerous
examples of products that, when first
introduced, generated
excellent
revenues
and margins; however,
without appropriate protection, as
competitors
introduced similar
products, pricing and margins were compromised. Ultimately, the
commodity nature of these products forced pricing to be tied
directly to the cost of manufacturing and marketing with little
profitability remaining.
Reducing Expenses: Short vs. Long
Term
Consequences
The difficulty of expense cuts lies in weighing their immediate
benefits against possible long-range disadvantages. For example, we
earlier discussed the costs associated with obtaining and
protecting patents. Certainly, we would have better short-term
results by not spending the money to
pursue
this strategy; however,
the long-term effect on our business would be to reduce all of our
margins in the future as our product categories became more
competitive. Before entertaining this expense-cutting option, one
must be certain of the importance of the short-term gain. If you
are running an efficient operation, cutting enough expense to
generate a significant profit improvement is
problematic
at best.
Of course, if expense cutting is necessary due to poorer than
expected results, the first cuts should probably be in executive
compensation. After all, if results are less than expected, one can
generally
look to the leadership to understand why. In this regard,
paying executives bonuses in
years
of
less-than
-
stellar
results is
a shameful example of totally
wasted
money.
Analyze, Analyze, Analyze
To maintain our edge with respect to managing our company and
staying profitable, our mantra is analyze, analyze, analyze. No
financial metric is so insignificant that it cannot be
analyzed
and
improved. The principle of analysis also applies to another
vital
component of our business: our customers. Every month we break down
our business in
numerous
ways. We look at sales by customer,
product, and region. We look at average selling prices and analyze
them in the same way. All of the data is then viewed via trend
analysis. These metrics in and of
themselves
are important, but
when
viewed
in month-over-month and year-of-year trend
reports
,
variations really stand out.
Such analysis is the basic blocking and tackling of business. We
like to take this a number of steps further. For instance, to as
great an extent as possible, we try to provide
ourselves
with the
same data for our
competitors
. We study our markets and look for
trends as they apply to our customers. This is extremely important
in understanding our own trends as well. Thus, it is very important
to look beyond your own business in order to improve it.