Up Your Profit
Two Ways to Increase Your Bottom-line
Most company leaders would like to increase profits — so would their investors. It’s almost always a top priority in every company’s strategy, and definitely becomes the main focus when they’re in decline or stagnant. There are two fundamental ways to increase business profits: grow revenues or reduce expenses. Strategies based on either can be difficult to successfully execute and may give unexpected results. In the complicated machine of business, changes can either run things faster or throw in a wrench.
There are two ways to grow sales revenue: raise prices or sell more. Raising prices is a seemingly quick way to drive profit to the bottom-line, but there’s a tradeoff. A high price tag might deter customers — simple cost and demand. Instead you could increase your marketing with new innovations, better trained sales teams, new locations, promotions, etc. which could increase sales, or just increase your own price tag and not sales. Remember, for every unit sold, there’s a cost of goods that cuts into the bottom line. So what can you do?
Henry Ford had a brilliant solution to his problem. In 1909, his Model T sold for $220, nearly $6,000 in today’s standard. Ford wanted to increase sales by doing something revolutionary: making them more affordable. He wanted his own employees to be able to afford the new innovation, and cutting the price was the only way to do it. He presented his idea to the board which, thinking that he was wrong, tried to oust him — even suing him for control of the company. But Ford prevailed. By 1914, he slashed the prices to $99. Margins on each unit stalled, but sales revved, and bottom-line profits rose from $3 million in 1909 to $25 million in 1914. See any picture of New York City from 1900 to 1913, and the evolution from carriages to cars proves his success.
Search the earnings transcripts of some of the most successful companies in the world, and you will undoubtedly find more than one executive touting their cost-cutting initiatives. Why? Because reducing any type of expense (assuming the same sales volume) will increase the bottom-line. There are many sources of costs in any business and therefore many pieces to trim, just as long as you’re careful to not shave too close. If you cut employee benefits, for instance, you might lose valuable employees and incur greater costs to hire new people and train them. Many companies struggling during the last economic downturn boosted their profits by laying people off. The challenge with this strategy is that, as demand increases, you may not have enough of the right employees in place to meet customers’ needs.
For example, Circuit City saw declining success in 2007, and its new CEO eyed an opportunity to amp profits back up by laying off every sales associate earning 51 cents over its “established pay range”— essentially pulling the plug on 3,400 of its top performing workers at once. A detrimental move, Circuit City quickly realized it also fired its most hardworking, knowledgeable associates best able to help customers. And, why would remaining employees work hard if the rewarded raise could get you a pink slip? Over the next eight months, Circuit City’s share price dropped a shocking 70 percent, and in November of 2008, the company declared bankruptcy. Though on paper the cut made numerical sense, Circuit City didn’t realize that the price of demoralizing its employees would end up shutting it down. But I know what you’re wondering. Have they tried turning it off and on again?
In the end, if a company wants to increase profits and continue to grow, it must increase revenue and control costs. Both working together creates the strongest company. Cutting costs is more efficient, but if the results don’t strengthen the company and its ability to sell more, what was the point? Similarly, if increasing sales is canceled out by the costs engendered by it, nothing is accomplished. If a company can both control its costs and improve its sales, you will see it succeed for the long term.