Processes Drive Margins at SMBs
- stephen5623
- May 8, 2024
- 2 min read
Most people think price drives margins. The math is simple: Revenue – Cost = Profit. Revenue is based on price and profit gets to margin so you have the equation.
To get this out of the way – price is critically important and there is a lot to discuss there. Raising prices can be tricky, pricing in a competitive bid can be uncertain, prices below your unit costs are bad…
Still, I think of margins more comprehensively and I use margins to create my own mental model of the company. Depending on your business you have a direct margin, a gross margin, EBITDA margin, operating margins. All of them can be set to a standard appropriate to your company and your circumstances – say a 40% gross margin as a target. This takes a lot of noise out of the business and will keep you focused on the right thing as revenues and costs move around.
What this also means is that price is part of a process that generates margin. For instance, here are some elements that need processes as they generate gross margin and operating margin:
Generating demand and setting prospects on a purchase journey (operating margin).
Closing transactions and related sales costs (operating margin).
Maintaining price discipline, discount discipline, volume targets and production scheduling as orders are finalized (gross margin).
How the producing resources of the business accept those orders and the cost of producing the goods or services effectively and efficiently (gross margin).How provisioning into delivery occurs (gross margin).
How costly it is for the customer to consume whatever it is you are producing and related rework/accommodations (gross margin).
The cost of billing and collection (a little of both!).
Warranty costs and other post-sale expenses (a little of both!).
You can talk about price, but it is far from the only thing as the list above indicates. The shortcut to get to price driving margins is on the other side of the coin that says “growth hides all sins.” To operate effectively and durably over the long term a little more expansiveness is required.
