Do you know that you are in control of your Gross Profit margin? Yes, it is a business decision – or at least it’s supposed to be.

Too many businesses accept thinning Gross Profit margins as they believe that there is not much that can be done about it if they want to remain competitive. Is this true though?

The Gross Profit margin should be a strategic decision, based on the positioning of the company on the market and the ideal clients it wants to attract. It should not be a low-price race with competitors to gain new customers– or keep existing ones. If the only thing you fight for is price, that probably means that you haven’t identified your competitive advantage yet.

The fight for the cheaper price only applies when competitors sell the same products to the same customers under the same conditions. If you think about it, that does not apply to many markets.

Companies usually will add some kind of value to differentiate their products or services – by offering a customer experience, bundle packages, innovative products etc. And depending on how good the differentiator is, some clients will be ready to pay a premium for it. Not all clients but some will. The question is who will and who do you want to attract – who are your ideal customers for your business offering?

Once you’ve identified your ideal clients, you need to ensure that everything you do is aligned with their expectations. This way, you addvalue to your offering.

Now you need to ensure that the price you charge is also aligned with the perceived value. Too cheap is suspicious. Too expensive and you lose your ideal client. The secret is to find the sweet spot. And the sweet spot needs tobe at your desired -sustainable - gross profit margin.

What if it’s not? Go back to the drawing board and see what you need to work on to ensure it is: do you need to add more value-add to keep your price? Or do you need to see what you can skim to reduce costs without lowering value?

If you need help, contact us. At #Strategico, we’ll help you design a strategy consistent with profitability.

We also offer Essential Financial Skills workshops to help you understand your figures and be in control of your business. Be in touch for more information.

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