Restructuring Advisors

How to Increase Profitability

In Search of Profits

Over the last decade many organizations have focused on cutting costs as the best option to enhance profits. While being a low-cost provider is always advantageous, pricing strategies and the proper application of price increases will always play a significant role in determining overall profitability. In our observation we see that two of the prime reasons profit enhancements aren’t realized are.

1. Many organizations don’t know what their costs actually are.
2. Functional departments within organizations have conflicting priorities.

Relative to costs, in nearly all companies there is a direct correlation between costs and pricing. Our experience over the last 5 – 7 years is that most companies started but less than half completed cost cutting actions. Of greater concern is that practically none have gone back to complete an accurate analysis of what savings were actually realized, nor did they fully document their new cost baselines. It’s not that people don’t care about the information it’s simply that most organizations do not have the resources or experience internally to complete the process.

Organizations around the world work hard to align corporate goals to achieve a cohesive effort. However in the day to day activities departmental agendas can surface. Sales organizations resist price increases because of the impact on clients and ultimately the sales team’s ability to meet targets.

Operations and/or distribution departments work hard to manage flow and take advantage of consistent throughput. They fear a price increase will affect the mix of business and everything from raw material requirements through monthly inventory turns. Finance works to satisfy all corporate profit objectives through increased margins but also is concerned about the top line and keeping operating expenses in check. Each functional area has reasonable goals for their individual part of the organization. The question is how to mesh these objectives to create value.

How, then, do many organizations settle on price increases? Typically, a well-meaning individual says, “Let’s just apply a 3.5 percent increase across the board’.

We believe that to achieve and sustain profitability a best practice is to complete the cost analysis first. Costing records are created detailing both fixed and variable costs on all products and services. Predictable adjustments are incorporated for known factors such as raw materials, health care, transportation, research and development, etc.. After discussion with the management team, all open questions are investigated and verified or corrected. Only at that point (normally 2 – 3 weeks) is final costing documentation generated. Finally, appropriate margins are applied allowing the functional departments to provide input on competitor pricing and other relevant market conditions.

One advantage of this data-driven approach is organizational buy-in. The sales and marketing teams can build out quotas for the operations team to use in their planning. Armed with cost specifics, sales and marketing can also prepare a communications plan for customers detailing the rationale behind each price increase. Likewise, finance can establish well-considered points for budgets and forecasts. Utilizing this approach, much of the data-scrubbing work is done one time only. In our experience once an accurate costing analysis is complete, updating the information on a semi-annual or annual basis is less intensive and can be managed with fewer resources. When using fact-based analysis, organizations net significantly larger price increases than when using less informed, ad hoc approaches.

One other best practice when a costing analysis is complete is to build out an appropriate set of simple yet effective pricing tools. These tools capture all pertinent data and allow organizations to reduce their response time and improving accuracy on quote requests from new business and prospects alike.

If you would like our team of professionals to help an organization develop its pricing strategy, analyze its costs, or address other current challenges, please contact Restructuring Advisors at (844) 567-2341.