Sure, there are business costs that are easy to calculate like raw materials and utilities, but what about the things that take away from a business’s bottom line more stealthily? These hidden costs can easily eat away at healthy product margins and spiral out of control, leaving unprofitable businesses in their wake. So what are the most common business killers?
The things that go into a finished product include everything that you put in to make it – no matter how inconsequential they seem. This means that if you make and sell a cheeseburger, the product inputs aren’t simply the hamburger patty, bun and cheese; they’re also the condiments, lettuce, paper wrapper, order number sticker, and paper bag it goes into. One mistake that businesses make is incorrectly calculating the cost of their products by leaving out some product inputs. Or, in the case of the burger joint that Marcus revived, they just assume the costs of these inputs without knowing for certain exactly how much they cost.
Using the Wrong Tools
The right tools can maximize productivity and allow a business to scale up operations as needed, but the wrong tools can drive up product costs and hinder growth. Many small businesses are afraid to invest in costly tools to improve production, or don’t have the cash flow needed to do so, but Marcus shows us how much of a difference the right tools can make. For instance, when Marcus helps a struggling drum company, he purchases a CNC machine that can do a job in 9 minutes with perfect precision that previously took a skilled employee 45+ minutes to do by hand. When Marcus goes into a furniture company, he does the same thing – replacing small hand sanders with new industrial sanders that will last longer and do the job faster. By eliminating the time waste associated with using the wrong tools, he’s able to improve profitability for these companies right away.
Time waste can also come from disorganization because any time employees spend looking for parts or moving things from one place to another is time that they’re not spending making things. In our last article we went into depth about how Marcus improves processes – rearranging work stations, parts, and tools to maximize organization.
Another way that disorganization can hurt a business’s profitability is by prolonging the amount of time it takes to make and ship products. Longer product delivery lead times can result in more canceled and returned orders. This result is just inevitable because some people may decide that they do not want to wait for their order and will just go elsewhere to get a similar item instead of waiting.
Any product waste costs money. Now, some waste is inevitable, and some industries will have higher rates of waste than others, but simply reducing waste is a great was to keep more profits. For instance, Marcus visits a florist that only uses domestically grown flowers in order to reduce the waste associated with having to important large quantities of exotic flower varieties. This innovative business decision causes their waste rates to be a fraction of the industry standard.
Pricing can be incredibly complicated, which is why large companies employ professionals to study and determine pricing for their entire product lines. But generally speaking, there are a few important pricing elements that all business owners need to understand. For instance, with a tiered pricing structure consumers tend to fall predominantly in the middle or at the lower end of the spectrum. This means that your pricing can actually be hurting your profitability if you offer lower cost versions of your flagship products. This is the case in that burger restaurant that Marcus visits. Their signature cheeseburger has always had a set price but then they start offering a cheeseburger for a dollar less that doesn’t have any of the fixings on top. Not surprisingly, many of their customers start ordering the cheaper burger to save some money, which causes them to lose $1 on each sale by omitting ingredients that only cost about $0.10. When Marcus sees this, he immediately nixes that menu option from the lineup. In the same vein of consumers preferring the least expensive versions of products, Marcus works with company that sells expensive hand crafted gazebos. When many consumers see that the gazebos start at like $10K, they’re immediately overwhelmed by the hefty price tag and ignore the marketing. So Marcus has them offer a baseline model for much less with a la carte upgrade options. This way consumers are lured in by the lower price and can then choose to pay more for the features that are most important for them.
Now it’s time to take a look at your business! Where can you eliminate hidden costs in order to achieve additional profitability? Think like Marcus would and uncover places where your business is accumulating unnecessary costs – both financial costs and opportunity costs.
Kate Pierce is the owner of LionShark Digital Marketing LLC, a West Michigan internet marketing company. Her areas of expertise include Paid Search, Search Engine Optimization, Social Media, Web Consulting for small businesses, Copywriting and Local Online Marketing. She lives in the Grand Rapids area with her husband and enjoys cooking, watching sports and spending time outdoors. Like a true digital marketing expert (i.e. geek), she loves talking about marketing theory and SEM trends… so don’t say you weren’t warned!