When you made the decision to start a business, you probably had no idea you’d need to turn into a wordsmith just to stay out of the red. Until now, understanding the definition of seemingly similar words has never been more important. In fact, your bottom line depends on it.
At first glance, value and cost may seem like the same thing but if you look a little closer, you’ll learn to appreciate their differences.
Value (noun): The regard that something is held to deserve; the importance, worth, or usefulness of something.
Cost (noun): An amount that has to be paid for spent to buy or obtain something.
Protect your margins
It’s not always easy to predict the exact moment when revenue will take a hit but challenges are often looming in the distance.
Most business owners think raising prices is a simple defense, but it doesn’t always secure your position. The best way to protect your company’s financial margin is by recognizing the difference between value and cost.
As you can see, value can transcend the highs and lows stirred by abrupt market changes. Value determines what your audience sees when they look at your brand, and it measures how you can substantiate the costs associated with your products and services.
One of the greatest mistakes you can make is using the competition to gauge your costs. In a buyers’ market, it may be tempting to try to attack a competitor’s cost advantage, but it doesn’t make sense if the value of both brands don’t compare.
The question then becomes, how can you cut costs without diminishing the value you provide?
Perform a strategic cost analysis
Every industry fights inflation in a different way. First review your cost economics. When you do, you’ll know exactly where to look for savings. Evaluate every single expense in your business. Then create a diagram that compares cost to value in each stage of production.
Supplier Value: Cost of purchased input materials
Company Value: Capital costs, Operating costs, Profit Margins
Distribution Value: Forward channel costs
Each of these factors contribute to your pricing strategy, which ultimately determines the value and cost to the consumer. It doesn’t hurt to compare your value chain to a long-term analysis of your competitors’ cost analysis, but make sure you’re considering variables that may impact your bottom line (like region and distribution volume).
Last, but not least, factor in future inflation into the analysis of both your business and your competitors, for an accurate measurement of the cost analysis of both.
Are you leaving money on the table?
With a complete cost analysis in hand, you’ll have a solid foundation to build a more effective pricing strategy and mitigate future expenses. Quantitative reasoning avoids the risk of falling into competitive pricing traps; which gives you the power to proactively choose your financial position.
What are your long-term fiscal plans?
Do you want to become the low-cost provider in your market?
Would you like to focus your sales on a segmented portion of the industry?
Are you planning to boost your value proposition to differentiate your brand from the competition?
When you look at your value chain, you can inspect costs across your supply chain. Each channel presents opportunities to minimize expenses without sacrificing value.
Understand your weaknesses and where you’re leaving money on the table. Is your weakness showing up in the product line, targeting, distribution channels, etc.? Before you can tackle the entire value chain, you need to address each segment. If you discover you’re losing money:
negotiate better terms with suppliers
substitute materials with more cost-efficient and comparable options
look for a more economical distributor
Automate back-end tasks to save money in core areas of your business (e.g. sales, marketing, finance and administration. Possible solutions may include:
Outsource or hire freelancers
Reduce business insurance premiums
Renegotiate contracts prior to renewal
Review invoices for overpayments and negotiate payment terms
Reduce printing and paper consumption
Sublet available office space
Eliminate overcapacity costs (e.g. after-hours energy consumption and leases on unused and underused vehicles
Monitor ROI on all marketing efforts
Lastly, use your Profit and Loss (P&L) statement to organize and rank your top expenses. Compare each expense to your budget. Also, don’t just cut expenses for the sake of meeting your numbers. Make sure adjustments produce noteworthy results.
Joel Goldstein is a retail trendspotter, CPG strategist and best-selling author. He is the “go-to” person when trying to place a new product into retail, as well as the host of RetailSummit.live. As expert in the industry, Joel is able to advise you where your product will be best received. Connect with @mrcheckout on Twitter.