Smaller Margins Are A Growing Problem But There Is A Cure

I hear it everywhere I go and from every small business owner I speak with. Margins are being pinched. What used to be 15 -20% is now 5-10% and business owners are happy to get the business. There are many reasons this is happening:

1. Increasing overhead is reducing profits, insurance is creeping up, fuel and utilities cost more every day and the cost of goods is higher. In short, everything is costing more. Revenues are down, it is a huge challenge to pass this additional cost on to the client and thus, profits are down.

2. Competition is fierce and many competitors are reducing prices just to get the business forcing others to follow. The net result is a downward trend in pricing, further reducing profits.

3. The consumer market is getting smaller and spending less, often withdrawing from purchasing many products and services, further reducing gross revenues and putting more pressure on the business, effectively reducing net revenues.

4. Consumers are negotiating more and demanding lower prices.

The problem is so widespread that small business owners must rethink their approach to doing business as the margins and profitability continue to decline forcing many out of business. Of course, there is much a small business owner can do and must do. It starts with tightening your procedures, knowing your numbers and controlling your business by managing with your numbers in view. The first obvious point–if you don’t know your numbers you are flying blind. If you do know your numbers you know exactly where your problems are and can begin to address solutions. Controls are at the heart of this scenario, as your employee productivity is probably an issue but this can be cured. Certain overhead items can be renegotiated and reduced so this may also be controllable. Certain products and services must either be repriced or eliminated. To do these evaluations you must have the information.

In the end, it is likely that you will have to reinvent your business, eliminating that which is not profitable and focusing on that which is. Further, becoming the best in a area at a particular product or service helps add value to the perception and results in higher prices and greater profitability. It is called niche marketing and  delivering perceived value, value added not price discount. This establishes a competitive position that cannot be challenged by price alone. This works.

Smaller margins are exactly what is happening. Doing something about it is the challenge. Accepting it as a reality is step one, making the changes necessary to succeed is the action plan you need. Information, and controls, then decisive action, deliver perceived value. This is what is necessary.