It’s the beginning of a new year…and you are looking to drive growth. We’ve talked about driving organic growth in the past by leveraging your Installed Base as well as the data you have at your fingertips. Along with that growth, comes the hope that margin expansion occurs.
Hope? That’s not a strategy, it’s a recipe for failure. So today’s blog is a tactical and prescriptive one to suggest ideas that deliver results!
There are departments in most organizations in which someone… or some team…is responsible for setting the appropriate price for your offerings. Whether it is a new piece of equipment or a part or service offering, setting the appropriate price for the delivered value is very important.
But what happens after the price is set?
Your employees (typically salespeople) now have to provide pricing to the end customer. In my experience, this is where margin erosion occurs. Many organizations have pricing approvals and levels of authority. However, there’s usually still some flexibility for pricing in the field. When price books meet the customer road, margin erosion from discounts is invariably the result.
The below graphic attempts to help to explain this at a high level. The example uses a sample organization in which financials are estimated with Cost of Goods Sold (COGS) of 72%, Gross Margin (GM) of 28%, SG&A of 18% and the resulting Operating Income (OI) of 10%.
In this example, an improvement of 1 point of price drops the reflective 10% of operating improvement to the bottom line. (See other weaker examples of margin expansion by leveraging COGS, Volume and Overhead).
The main point to reflect here is that a 5% decrease in price has to be offset with a resulting 17% increase in volume to maintain operating margin!
So, as you begin to utilize tools to understand your Installed Base and drive growth, don’t lose the expected operating margin from the growth by allowing your employees to not understand how price concessions affect your organization.
With proper care, you can drive both Organic Growth and receive the margin improvement for your organization. Start driving to those results today!