Cost control in business
In business, effective cost control is essential to maintaining profitability and competitive pricing. Learning from successful strategies in various industries can provide valuable insights. Here are some key methods to control costs and ensure business success.
Product Price vs. Product Cost
Understanding the difference between Product Price and Product Cost is fundamental. You can only price your product appropriately if you have a thorough understanding of its cost.
Consider the laboratory testing industry, where inefficiencies often lead to inflated prices. For instance, vendors might charge labs AUD 10 for a test that costs only AUD 0.50 to perform, and labs then charge customers AUD 50. By addressing this pricing model and offering services at AUD 10 instead of AUD 50, a business can increase volume, confidence, and network growth, establishing itself as a reliable name in the industry.
Control Costs and Keep Prices Low
Keeping product prices low can significantly impact a business's success. Companies with high prices often struggle due to uncontrollable costs, while businesses with competitive pricing thrive. Controlling costs involves not only understanding your expenses but also gaining insight into your vendor's costs.
For example:
"If you know the Cost of Goods Sold (COGS), you can do business. But if you know the COGS of your COGS (the cost of your vendor's goods), you can introduce disruption."
This means that reducing prices and remaining profitable requires a deep understanding of costs throughout the entire supply chain.
Bundling Services for Greater Value
Bundling services can lower costs and provide greater value to customers. For instance, a diagnostic company might offer a package of tests at a reduced price. A AUD 300 package could include multiple tests, providing substantial value and encouraging repeat business. This strategy involves optimizing resource usage to improve efficiency.
Finding Your Niche: Preventive Care
Targeting a specific market segment can help businesses grow. While many companies target a limited market, focusing on a broader or underserved segment, such as preventive care, can expand the customer base and create a recurring revenue model.
For example, a design firm might not only target large-scale engineering projects but also cater to clients seeking innovative, efficient, and sustainable solutions, thereby securing long-term customers.
Smart Cash Flow Management
Efficient cash flow management is crucial. A company might use a model where franchisees pay an upfront fee and receive a credit. This negative working capital model allows the business to invest the franchisee's money, reducing reliance on bank loans and mitigating risk.
For businesses, managing cash flow effectively means ensuring sufficient working capital to fund new projects without accruing excessive debt.
Maximise Asset Utilisation
Utilising assets to their full capacity is another key strategy. A machine that operates for only 2 hours a day is a liability, whereas one running for 22 hours becomes an asset. Increasing volume can help maximise resource utilisation.
In design and engineering, this translates to efficiently using CAD tools, manufacturing technology, and personnel. Continuously pushing capacity allows businesses to handle more projects without significantly increasing overhead.
Key Takeaways for Businesses:
- Understand Your Costs: Know the costs of your goods and services, as well as those of your suppliers.
- Keep Prices Competitive: Lower prices attract volume, which drives profitability.
- Optimise Resources: Bundle services to enhance efficiency and customer value.
- Focus on the Right Market: Identify and target underserved segments for long-term value.
- Manage Cash Flow Wisely: Secure working capital creatively, avoiding unnecessary debt.
- Maximise Utilisation: Ensure assets are operating at full capacity to improve efficiency.
By adopting these principles, businesses can control costs effectively, maintain competitive pricing, and achieve sustainable growth.