Are thin margins and good monthly bottom-line profits mutually exclusive events? They don’t have to be! When competitive pressures and pricing swings wreak havoc on your margins, here’s how to cope:
Manage your company with the assumption that thin margins are here to stay. Don’t hope you can get by until margins thicken up again. They may not. You must take steps to make your company successful right now.
Think marketing. When margins get squeezed, it’s almost a natural, knee-jerk reaction to immediately focus on cost reduction. That’s wrong. Your immediate, first focus should instead be on marketing. Your goal is to increase the dollar amount of gross profit despite shrinking product margins.
Stratify existing wholesale customers. For those marketers in the wholesale sector of the business, stratify your customers using the ABC method. (Details available here in separate article “How to Keep Profitable Customers”) When margins are thin, you simply can’t afford to serve very low margin, high hassle, slow pay or high credit risk customers.
Sell more products to existing customers. This holds true for retail, wholesale and propane accounts. When Meridian surveys marketer’s wholesale customers, we find most marketer sales reps leave lots of product and service needs on the table, which end up being filled by other vendors. For you to thrive in this low margin environment, you must start meeting 100% of your customers’ petroleum needs and look for ways to go even beyond your usual petroleum product lines. For retailers, you should focus on gross profit per transaction. Through careful product selection and innovative merchandising, you can increase your average gross profit per customer.
Find new customers. For retailers, ask yourself what customers are not frequenting your stores now and should be? Design an advertising campaign to reach those customers. Your campaign doesn’t need to be pricey. It can be as simple as distributing coupons to a nearby large employer. For the wholesale sector, identify the attributes of your high gross profit customers and then go find more just like them using a very specific and accountable sales strategy. (If you have a nagging thought that your sales process is less than stellar, have your sales manager attend our Focus on Competitive Advantage annual event where we always have great sales education.)
Streamline internal processes. Instead of focusing on pure cost cutting, which often results in unhappy customers, take a hard look at how you do business. How many steps do certain processes take in your organization? For instance, what number of steps does it take to close out your books each month? Are all the steps necessary? Could some be eliminated through automation?
Create a questioning company culture. Companies where employees are encouraged to question every procedure and process and are rewarded for streamlining and progressive new ideas always thrive. You want to hear, “Why are we doing it this way?” Then encourage your people to invent new and better ways to serve your customers more efficiently while maximizing sales.
Track errors and rework. A typical small petro marketer loses at least $100,000 a year to errors and things that have to be redone. Whether it’s store paperwork or rebilling of a wholesale customer, errors and rework escalate payroll costs. While you build a questioning employee culture, you should also promote error reduction, but not through typical finger pointing and blame. Instead, congratulate people on finding frequent errors and rework, teach them how to track them, discover their true source and celebrate error elimination. It’s not about who is making the errors, it’s about why they occur and how the system can be changed to reduce the chance for error.
Selectively cut costs! Do not cut any expense that has been proven to drive up gross profit or increase customer satisfaction. For instance, you have a yellow-page lubricants ad and 14 new customers came from that ad last year at a total gross profit of $70,000. The ad cost was $13,000. Cutting out that ad expense would not be in your best interest! However, switching from your two-way driver radios to a special low-rate cell phone plan has a savings of $5,000 per year, plus your drivers can directly call customers and other drivers at no additional cost. That’s a good expense cut that will save time, save money and increase customer response time.
Finally, reward employees for cost-saving ideas. Most controllers are amazed at the costs they missed when they tackle cost-reduction. By continually asking your entire staff for cost-cutting ideas, you’ll get more done, especially when employees see an associate being paid for a pretty common-sense idea that they could have had themselves!
To summarize, assume thin margins are here to stay, then, market, market and market! Get rid of errors, mistakes and rework, then involve all your employees in a cost-reduction plan. If you do each of these steps, you will survive thin margins just beautifully.