Management Memos

Making Measurably More For You Since 1985

January 2017
 

Your Margin is My Opportunity!
Amazon

At last, Amazon has finally said what we've all totally ignored! Your margin is an opportunity for everyone else! If someone else can do the same thing cheaper, you have a powerful new competitor.


Respect each new competitor. Don't believe your own hype here - "We're not the cheapest, we're the best!"

Fact is that most products are identical. It's the service that marks you out as special. And some of that isn't so special either! Despite what you'd like to think. Sorry, but it's true!

We all look at the margin we make, wish it were more, and know that it isn't enough - not for all the work, risk, and hassle.

That mindset is very natural, but it's our Achilles heel. It's the point where we're vulnerable to our competitors.

When a large outfit like 'Amazon' makes this 'Big Comment', it makes us all take notice. But it is really just a simple fact of business life.

In speaking at a seminar in New Zealand, the writer examined how 'business' has changed over the years. Some of those changes seem so long ago, we shouldn't even be talking about them any more.

When you take the long view, though, you see how little changes are happening every day. That's what gives rise to the concept of "continuous improvement".

It's fashionable to call this "planned obsolescence". Fashionable, maybe, but misguided.

Every new iPhone brings cries about something being obsoleted by the change. The truth is that the new model has reduced costs in every aspect of its manufacture.

There may be a new feature that adds to the price, and maybe that new feature also adds to the cost. But the manufacture of the core elements has been made less expensive. Every time. Every new model.

So "continuous improvement" really is code for "constantly forcing our costs downwards".

There seem to be many ways to reduce 'cost to manufacture'. New automation, or perhaps outsourcing. But none of these things is easy.

For a retailer, it seems so much harder. Yet here, there are lots of options too, including automation. You just have to imagine it!

You may not be an 'Apple', but cutting your costs is the only way to protect yourself from the 'margin hunters'!

Take The Long View Of Margins & Costs

Over time, constant changes make it possible to do business more efficiently, and at lower cost.

Go back 50 or so years. No fax. No email. No SMS. No Chatheads. Not even any computers. 50 years ago we didn't have B-double trucks, much of our freight went by rail, even by sea.

In those days "state distributors" and "wholesalers" were common. It could take weeks to get an order delivered, and a month to get the money. Today, an order placed today in Perth can be delivered by a Sydney supplier from his Perth stock, and the money received next day.

A lot changes in the way you trade. In the example given in that seminar, the gross profit to the final seller is eroding at about 1% per year. (See table)

Margin Reduction

This table shows manufacturer, distributor, wholesaler, and retailer 65 years ago. 33 years ago there were the manufacturer, wholesaler, and retailer. Today, just the manufacturer and retailer.

Although the retailer still has a margin of 50%, the dollar gross profit has fallen 33% in the last 33 years. That's 1% per year!

The idealised product is a really big jelly bean costing $1 to manufacture.

  

To stay in the game, that erosion of your gross profit has to be matched by a reduction in your operating expenses. For many typical small businesses, this means cutting your expenses by about $4,000 a year.

Now that is a big call - and it isn't optional!

What will you do in 2017 to cut that much out of your expense report?

 

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Any advice, information or comment contained in this document is general in nature, and should not be relied on as the basis for any specific commercial, business, employment, or financial decision. Specific advice should always be obtained for each individual circumstance. Accordingly any advice, information or comment contained herein is for general guidance only.

 

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