Tag Archive for small business profitability

In an Industry of Change

One of the most important assets a small business possesses is the ability to quickly change direction when its market changes. Usually, there are not a lot of chefs in the kitchen deciding how to best proceed, nor are there many departments fighting to keep their budget dollars.

Instead, an owner can make a decisive move that changes the company’s focus quickly. Sadly, many small businesses that have success cling to a model of, “If it ain’t broke, don’t’ fix it!” even as they watch their industry move through change, driven by a maturation cycle.

I recently spoke with a small manufacturer that was selling direct to large national retailers in an industry that had been going through consolidation for the past 10-15 years.  Last year, they lost their large retail customers who were going through the process of vendor consolidation in order to reduce what is called “soft costs” in the inventory cycle.   Soft costs savings are real and significant, especially for large companies selling a significant number of SKUs.  These savings drive industries working with commodities to go through consolidation, and it is a typical part of an industry’s maturation cycles.

Understanding this maturation cycle and where the industry is at when you enter can help you anticipate the future, and determine the best way to steer your business as you see signs of change within your industry.  Planning for what is extremely likely to come positions you to treat these changes as an opportunity, instead finding yourself in the reactive position of trying to find new sources of distribution when all the eggs in your basket have matured, and flown from the nest.

The Profitability Question

As a consultant, I look at it as my responsibility to help drive business for clients, but more importantly, profitable business.  This leads me to ask many questions when I first speak with a client, which include:

“What are the most profitable products or services you offer?”

“What do your most profitable clients look like, meaning; what are some of the commonalities among them?” (Such as, they are almost all women, between age 18-35 who love to go dancing on the weekends, etc.)

And in nearly 90% of my conversations, my clients have no idea.  I am a firm believer in 1) following your passion and 2) servicing your client’s at a superior level and that these should be credos for any company.  Nor do I think that all business has to be driven by chasing highly profitable opportunities if they clash with numbers 1 and 2 above.  However, I do believe that to have the resources to “work at what you love”, a client needs to be pursuing the opportunities that will fund their company.  Which leads me to:

Business owners need to take the time to identify where their income is truly coming from and what products, services, and/or clients are helping or hurting them.  At this point, they can re-evaluate the need of practices that actually slow down the success of their company.

What if the client LOVES their unprofitable services, products or clients?  Well, if they can identify the starting point for these unprofitable areas (for example, 5% gross profit margin on all sales of product A) they can start to work on a strategy to improve product A’s profitability.  This could mean reducing costs and/or increasing sales volume, as well as other considerations.  By focusing on goals for specific products, services and clients, in time, these least profitable, but most beloved aspects of their business, can become the ones that reward them for their efforts.

However, the result of not knowing the answers to these questions, and therefore taking no action to rectify a troublesome situation, can be a death spiral for a company.