Stars, Dogs, Cows & Question Marks: Your Product Mix Strategy​

Stars, Dogs, Cows & Question Marks: Your Product Mix Strategy


Your company’s product mix is the list of everything that the company sells. We often look at the product mix from a contribution rate or percent of each type of product that a company offers. The product mix strategy is the method by which you make a decision about how much of which products to sell, and which ones you may want to get rid of.

Boston Consulting Group developed a matrix – known as the Growth Share Matrix – which is used to categorize a company’s portfolio of products (or business units)  as a collection, and divide them based on performance.

Performance is denoted into four quadrants based on growth potential and market share. The categories are Stars, Question Marks, Cash Cows and Dogs. 

Stars are the products you want to keep. These are the best products you’ve got; the ones you are likely to put the greatest share of your marketing budget behind, and the one that you will get the best return from as you continue to develop and refine the product according to customer demands.  Not only is their current return excellent, they have continued high growth potential.

Cash Cows are offerings that you also want to keep. They have high market share, but low growth potential. These are the ones which will typically have a high profit margin and a rather predictable degree of stability.  They are like comfort foods for your markets; even if there are other products out there, your offering is one they find appealing.  You will continue to get money out of these products that you can use to invest into this offering and other areas of the business.

Dogs are your offerings that you should really consider getting rid of.  With both low market share and low growth potential, you will likely find that investing dollars into other offerings will yield a greater return. Keep in mind that over time, many of your product offerings will eventually end up in this category, which is why it is essential to continue to innovate.

The last category – Question Marks – also known as “Problem Children” – are those that have low market share but high growth potential. It is likely a great product that no one knows about.  This may be a result of under-capitalizing their product marketing or business development, difficulty in reaching their target markets, or they could be products that have a very specific use for a limited audience (or other factors). 

Regardless of which quadrant your products lie in, it will be important to watch them because they can move into one of the other three quadrants, which will change your investment strategy.  If you look at a typical product lifecycle, and apply this model to each of your products, you will have a better idea of how to treat each one and what to expect from their performance.

Source: https://lukasweber425.wordpress.com/the-secrets-of-marketing/product-life-cycle-stages-and-strategies/

WistBooks Financial Management. Wise + Strategies to take your business financials further.(TM) 

WistBooks provides integrated Bookkeeping, Advisory, and Financial Management services that leverage financial data to help small businesses execute a winning strategy. Through Quickbooks Online cloud accounting, financial dashboards and regular online advisory sessions, we support business owners and leadership in maximizing their financial decisions to maintain and support company growth.

We are offering all new clients a 10% discount on any service for the first year. Remember to mention WistGift to receive your discount.

We would love to hear from you.  Please share your thoughts and comments below.

Negotiation’s Impact on Working Capital Management

Negotiation's Impact on Working Capital Management

 

While most businesses pay attention to increasing revenue and improving margins, one way to accurately assess a company’s financial health is through its working capital. Even Cassio Casil, Managing Director of Corporate Client International Banking for J.P. Morgan Commercial Banking, states that even though this figure will not usually appear on an income statement, the working capital can still amount to significant revenue for a company.

However, having good working capital also means that one needs to have the appropriate interpersonal skills to achieve such a feat. This is where negotiation and building good business relationships can play a part in efficiently managing a company’s cash flow—something that is explained later on in this article.  

The importance of efficiently managing working capital

Simply put, the working capital is a figure that represents the available operating liquidity of a company. It is calculated by the current assets minus the liabilities and hints to the cash available for the business’ daily trading operations. From this definition alone, one can see that working capital is a determining factor of a business’ operational success or downfall.

Deutsche Bank explained that working capital management is how companies handle hidden liquidity reserves. This encompasses inventory management, debt management, accounts payable recollection, and assessing the payments due and a company’s accounts receivable.

Keeping a close eye on this financial metric gives companies the advantage to maximize their overall operational efficiency. Investopedia notes that the working capital’s objective is to minimize the cost of capital spent on the working capital while also making the most out of the return on the company’s current asset investments.

For a company to have a positive working capital management, the sufficient balance between assets and liabilities should be prioritized. This often means that there is an excess of current assets over liabilities, giving businesses the freedom to pay off short-term liabilities immediately.

How negotiation impacts company liquidity

Reaching positive working capital does not end with assessing financial assets and how to maximize operational flow. Negotiation and effective communication with both supplier, customer, and other parties that directly affect the company’s financial standing is also crucial.

Negotiation is the heart of every business relationship. A business owner and a supplier participate in a give-and-take agreement that benefits both parties. In fact, a study conducted by Thomas Atkin and Lloyd Reinhart from the Sonoma State University and University of Tennessee, shows that the more cooperative both parties are, the higher the satisfaction for both sides.

The same principle can be applied to working capital management. Namely, when it comes to payment terms in a supplier-business relationship. Mary Duffy, the Chief Financial Officer of a financial process automation solutions firm called SoftCo, stated that negotiating with your supplier to achieve longer payment terms can help with maintaining positive working capital. This gives businesses access to the needed inventory without completely depleting cash reserves.

To obtain a fair deal, clear communication on the credit and payment terms must be reached between company and supplier. It is also important to show how a lengthened payment settlement can benefit the supplier to make them more amenable to the idea.

The same can be said when it comes to a business’ relationship with its customer. Not paying the full amount to the supplier upfront also means that your inventory falls under the accounts payable category. Inventory must be liquidated in order to prevent the supplies from turning into a liability.

One must be sure that a customer is happy with the payment terms without the business having to compensate for a less-than-ideal agreement. As an example, a prospect seeking a number of handcrafted wooden furniture may like the idea of payment terms to extend longer than the industry’s standard. However, this harms the liquidity of the furniture business’ finances as they have designers, carpenters, wood suppliers, and other specialists to pay. 

In conclusion, having good bargaining skills can impact a company’s working capital management. Inventory will be well-stocked so as not to lose a customer without overstocking to the point that it becomes a company liability. At the same time, a business owner does not have to worry about depleting the company’s cash reserves as they have negotiated to pay at a later date. This gives the business more flexibility in day-to-day operational costs and future investments.

 

WistBooks Financial Management. Wise + Strategies to take your business financials further.(TM) 

WistBooks provides integrated Bookkeeping, Advisory, and Financial Management services that leverage financial data to help small businesses execute a winning strategy. Through Quickbooks Online cloud accounting, financial dashboards and regular online advisory sessions, we support business owners and leadership in maximizing their financial decisions to maintain and support company growth.

We are offering all new clients a 10% discount on any service for the first year. Remember to mention WistGift to receive your discount.

We would love to hear from you.  Please share your thoughts and comments below.

Key Factors When Pricing Services

6 Key Factors to Consider When Pricing Services

 

Is your service company profitable? How profitable? How do you know?

Pricing for service-based businesses is often elusive for many business owners. If you look at the price for consulting or marketing, for example, you will likely find pricing and pricing strategies all over the place. If they are based on hourly fees, some firms will focus on a low price strategy, others will be more “middle of the pack” – basing their pricing on average market rates, and others present themselves as premium service offerings. If they are project-based, they may price based on estimated hours or even based on the future value of the service.

Regardless of the pricing strategy, in order for a company to be profitable, it is essential for the company to have a method for creating it.  Below are some key principles to consider when establishing pricing for your service business.

  1. Profitability: Profitability is always going to be the most important element of your pricing strategy. If you are working on a cost-plus basis, where your pricing strategy is based on covering all of your costs – including a markup for operations, make sure to add in profit margin. Take a look at this article on business profit by thebalance.com
  1. Cover ALL of the labor: While most business owners are conscious about covering the costs of their staff, sometimes we as business leaders don’t cover the cost of our labor. You can use a cost calculator like this one provided by Tsheets by QuickBooks.
  1. Operating markup: while many firms will opt to have some type of operating markup, it is important to have a method of determining what that number should be. If you look at your operating costs for the month versus your total revenue for the month and find that you’ve been doing a 10% markup but your operations actually cost your 15%, you’ll need to make an adjustment. Your operating expenses are eating into your profit!
  1. Competitors: Find the firms that are most closely aligned with what you do – both direct and indirect competitors and learn what they are charging. Sometimes you may find that they are charging a lot more than you are and you are leaving money on the table! Keep in mind that the unique value that you provide may be something that your customers would be willing to pay extra for.  Understand the benefits and disadvantages to this approach.
  1. Market: Your market has a mental expectation associated with what you will charge. Simply stated, if you charge more than they expect, it will be difficult to close them. If you charge less, then they will likely be suspicious of your abilities. Side note: the alignment between your market’s impression of your company and the price they will be willing to pay has everything to do with how the company is positioned.  Positioning is part of what influences a customer to buy from you.
  1. Industry: Your industry may influence how you are able to charge for your services. For example, if you are in construction doing bid work, you may find that certain customers will want to see line-by-line what they are paying for, including any markup that you plan to include. Which means that if you don’t provide that information, you won’t be included in the bid opportunity.

Your company’s pricing strategy requires an investment in time to complete, but it should result in a pricing model that will allow your company to sustain.  Having a process or methodology in place will help for when the market shifts.  Not fully understanding your pricing strategy could lead to under or over pricing and make it very difficult for you to maintain solvency.

  1. When pricing services, it is important to ensure you have considered the following factors to ensure profitability with each transaction.
  2. Regardless of the pricing strategy, in order for a company to be profitable, it is essential for the company to have a method for creating it.
  3. Profitability is always going to be the most important element of your pricing strategy.
  4. Find the firms that are most closely aligned with what you do – both direct and indirect competitors and learn what they are charging.
  5. Your company’s pricing strategy requires an investment in time to complete, but it should result in a pricing model that will allow your company to sustain

 

WistBooks Financial Management. Wise + Strategies to take your business financials further.(TM) 

WistBooks provides integrated Bookkeeping, Advisory, and Financial Management services that leverage financial data to help small businesses execute a winning strategy. Through Quickbooks Online cloud accounting, financial dashboards and regular online advisory sessions, we support business owners and leadership in maximizing their financial decisions to maintain and support company growth.

From now through June 2020, we are offering all new clients a 10% discount on any service for the first year. Remember to mention WistGift to receive your discount.

We would love to hear from you.  Please share your thoughts and comments below.

Revenue vs. Margin: Why Profit Margins Matter

Financial Goals: Target Revenue or Profit?

As with any other company, businesses often look forward to increasing revenue. A 2015 study conducted by SME lender Fleximize shows that 49% of the companies surveyed are optimistic that their monthly revenue will increase in the following year.

This shows that business revenue is often used as a basis for entrepreneurial success and profitability. However, this belief is something that should be reconsidered as profit margins may play a bigger role than you think.

Why profit margin matters

Fundera perfectly describes what profit margins are—this is the percentage that shows how much of your revenue is actual profit, or money earned, as opposed to business costs and expenses. Overall, profit margins are often used to gauge a company’s financial health.

According to Vend’s 2018 research, the average gross profit margin in retail is 53%. The report illustrates that even though beer, wine, and liquor stores raked in the highest revenues, their margins were the lowest with an average of around 35.64%. On the other hand, beverage manufacturers only brought in an average of $26,159 monthly revenue but their profit margins were the highest out of all other industries at 65.74%. This signifies that most companies in the beverage manufacturing industry were able to achieve a good balance between gross revenues and margins.

To put everything into perspective, a high annual income may also mean that you are spending more on monthly operational expenses in order to boost your business further. This can lead to a low-profit margin, which means that your company may only break-even when it comes to sales. Since margins are tight, this ultimately gives you less flexibility in case you plan to expand in the future.

Profit margins may also play a key role in identifying issues that need to be resolved. To cite an example, a low margin despite having a team working round-the-clock may indicate that there might be a problem in your pricing structure or expense management. Despite staff productivity, the company is not earning enough revenue because they priced their services too low.

Achieving higher margins 

From this alone, one can infer that cutting down on expenses is the solution to gaining higher profit margins and improved company flexibility. However, Investopedia also highlights the fact that decreasing costs does not mean better profit margins. In most cases, this can even lead to lower revenue.

This raises the question: How can you increase profit margins instead of simply relying on boosting revenue?

Putting all your energy on marketing and selling higher-end products can help. Business motivational speaker Tony Robbins encourages entrepreneurs to market products that bring in the most income and help increase your profit margin percentage, especially since quality products inspire brand loyalty.

Keeping a close eye on product inventory is also a must. There was a time when retailers suffered a globally accumulated total loss of $1.1 trillion due to overstocks and out-of-stocks. When an item is simply sitting in your warehouse, your business cannot add it to your monthly profit margin. Overstock can also lead to markdown sales—which can lower your profit for the sake of selling the item. Similarly, repeated out-of-stock items can affect customer loyalty. Order fulfillment takes longer and there are fewer opportunities for impulse purchases. 

Finally, reducing costs is a faster way to further boost margins. The less your monthly expenses are, the more you offer your company the opportunity to expand in the future. This may mean relocating your company to an office with lower monthly rent or something as simple as investing in one project management tool that fulfills two features rather than two programs for separate needs.

In conclusion

Oftentimes, business owners prioritize increasing revenues as it is believed that the higher the income, the more successful a company is. However, your profit margins can give you an overview of how efficient your company is, which makes it crucial to consider when planning your business strategy. Ensure that you consider maintaining good profit margins that will protect your cash flow, and make the business grow. 

 

WistBooks Financial Management. Wise + Strategies to take your business financials further.(TM) 

WistBooks provides integrated Bookkeeping, Advisory, and Financial Management services that leverage financial data to help small businesses execute a winning strategy. Through Quickbooks Online cloud accounting, financial dashboards and regular online advisory sessions, we support business owners and leadership in maximizing their financial decisions to maintain and support company growth.

From now through June 2020, we are offering all new clients a 10% discount on any service for the first year. Remember to mention WistGift to receive your discount.

We would love to hear from you.  Please share your thoughts and comments below.