Reduce Or Revenue?
It’s a decision business leaders continually grapple with when planning for profitability…
Is it better to focus on decreasing cost or increasing revenue?
While cost-cutting trims off excess waste from your operations, raising revenue increases cash flow into your business. This post delves a bit more into what each side has to offer.
Let’s get started!
What Happens When You Reduce Cost to Improve Profitability
Effect on Quality
Opting to decrease cost can raise your profitability but there are caveats. First, the volume of sales and product/service prices your business is pulling in has to remain the same.
Secondly, reducing costs is only best done if the business operations of your company are below maximum efficiency. If you are already working close to maximum efficiency, cost reduction may lead to undesirable consequences like low quality.
If lowering costs compromises your product quality, it would affect your brand perception by the public. The outcome may now be to cut price so you can maintain your existing sales level.
Cutting price erases any potential profits you may hope to gain and the final result is a devastating net loss which you were trying to avoid in the first place.
On the other end of the spectrum, if you can efficiently reduce cost without lowering quality, sales volume, and price, then cost-cutting could lead to higher profitability.
Staff Perceptions AND Cost-Effectiveness of Cost-Reduction Projects
In businesses with low or tight margins, embarking on cost-reduction projects may not be advisable.
One of the reasons is that cost-reduction projects usually take much longer to execute and the length of time makes them more expensive than pricing projects.
Recouping expensive sums spent on projects in a low-margin business would require an increment in revenue. So, why not embark on a project that would have brought in more revenue in the first place.
Not that you should totally neglect trimming unnecessary costs in your company.
Operating at maximum efficiency should always be a priority for any manager, but constant cashflow is the lifeblood a business needs to sustain itself and grow.
And you get that by making revenue generation projects a higher priority.
Another thing about many cost-reducing projects is that a lot of managers are less enthusiastic about them. In many cases, managers and even staff members see the “savings” produced by the expensive project as not worth it.
Managers also have a negative view of the expensive cost-cutting project because they see the money saved as small compared to what a good pricing strategy would have brought in.
What Happens When You Raise Revenue to Improve Profitability
Any business that wants to grow has to be 100% committed to increasing revenue. While that is not the only criteria needed for growth, it is the topmost criterion.
Lowering costs isn’t capable of generating the kind of cash a business needs to stay afloat in hard times (a good example is the pandemic period).
The best route to long-term success is solidifying your customer base along with increasing your revenue and maintaining expenses. To increase revenue, one good strategy is to build your pricing power through branding.
Pricing power makes your products or services command higher prices without the risk of losing customers. Many customers would tell you they prefer a quality product with a price that matches the value of that product.
Although people love cheap prices, there are still many that will happily pay more for goods or services they perceive as having high quality or exceeding standards.
Delivering genuine superior products will not only maintain customer loyalty, but it also improves customer satisfaction, while reducing your chances of replacing faulty products.
Whether you focus on short or long term pricing optimization is a safe choice
In today’s disrupted & shaken up market, your basics like pricing need solidity to become resilient.
Have a look here at examples of companies that went successfully on that path
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Which Is Better For Your Company in 2021: To Reduce Cost Or Increase Revenue?
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