Is More Sales Always the Answer?

Is More Sales Always the Answer?

For all businesses increasing sales is one of the most important goals, but sometimes we see it as the answer to everything.  Indeed, most financial challenges could be solved with more sales but there are a few that it cannot, and is not the only solution to bottom-line profitability.

Perhaps your business is young and struggling to gain the sales it needs to be viable, or conversely maybe you’ve been around a while, been to the very profitable mountain top but now sales are lagging putting financial pressure on your business.  But even if your business is doing well right now and sales are growing this advice is important for you also.

It is human nature to always be building something better than what you have right now, both professionally as well as personally.  When we are struggling, we tend to conserve our resources, but as we grow, we are inclined to get a little fat (figuratively), and make things more comfortable for ourselves and often for others that we care about.

The trap of creating high overhead and cost of doing business is an easy one for you or I to fall into.  The cliché that “if you take care of the pennies then the dollars will take care of themselves” may be over used but still stands true and can often be the difference between success or failure in an economic downturn, changing customer demands, inflationary times, increased competition, and more.

Think about it.  If something were to force you to lose 20-30% of your business, would you survive?  In 2008 many did not!  And those that did were watching their pennies long before that event occurred.

Let’s say that you make widgets and they cost you 85 cents to produce and you sell them for a dollar.  This leaves you with 15 cents to pay overhead and make a profit.

Lesson 1:  Contain your Overhead.  If your overhead goes up, even if it is commensurate with sales going up you are doing it wrong.  Overhead is supposed to be a “Fixed Expense”, this means it is a static amount of dollars that should remain the same even when sales go up or down.

The whole idea of business is to sell enough to amortize the cost of overhead across the sales volume until it becomes negligible on a per unit or per dollar basis.  And that is when you can get very very competitive!

Businesses tend to wait until they get into trouble before trimming and controlling overhead.  And if that overhead includes leases, loan payments, or monthly costs that you cannot get rid of in tough times then it can easily sink you should sales dip.

Now let’s say that we can reduce the cost of widget production to 80 cents per unit, just by shaving 5 cents from the cost of goods we have increased the amount of money we have for paying overhead and making profit by 33%.  That is huge right?  But wait there is more!… if out of those original 15 cents gross profit 5 cents was what was left after paying overhead, now you would have 10 cents which is a 100% increase or the doubling of your bottom-line.

What could your company do with twice the bottom-line profit?  I hope it is not to go out and buy a “nice to have” instead of a “need to have”.  Because this increased contribution margin will allow you to weather any economic storm of the future, and perhaps allow you to capture a larger piece of the market right now.

Lesson 2: Increase Your Contribution Margin.  What is left over from the sale of a product or service after you buy or produce it is your gross margin.  When you state that in terms of each dollar of sales in the form of cents, that is your contribution margin.

What we always want to be doing is looking for ways to increase that number (i.e. 15 cents to 20 cents).  Increasing the contribution margin is crucial for improving the profitability of a business.  There are many ways to do this and some work better for one industry and not for others.  Here are several ways to increase the contribution margin:

1. Price Increase:
   • Analyze market conditions and competitors to determine optimal pricing.
   • Consider implementing dynamic pricing strategies based on demand and customer behavior.
2. Cost Reduction:
   • Negotiate with suppliers for better terms or discounts on bulk purchases.
   • Streamline operations and identify areas for cost-cutting without compromising quality.
   • Regularly review and renegotiate contracts with vendors to ensure favorable terms.
3. Product Mix Management:
   • Focus on promoting and selling high-margin products or services.
   • Evaluate and eliminate low-margin or unprofitable product lines.
   • Introduce premium versions or add-ons to existing products to increase overall profitability.
4. Operational Efficiency:
   • Improve production processes and reduce waste to lower variable costs.
   • Invest in technology and automation to enhance efficiency.
   • Train employees to increase productivity and reduce errors.
5. Volume Discounts and Bundling:
   • Offer discounts for bulk purchases to encourage larger orders.
   • Bundle complementary products or services to increase the average transaction value.
6. Targeted Marketing and Sales Strategies:
   • Identify and focus on high-margin customer segments.
   • Develop targeted marketing campaigns to attract customers interested in high-margin products or services.
7. Supply Chain Optimization:
   • Optimize the supply chain to reduce lead times and holding costs.
   • Explore alternative suppliers to find cost-effective options.
8. Cross-Selling and Up-Selling:
   • Encourage customers to buy additional products or upgrade to higher-margin options.
   • Train sales teams to effectively cross-sell and up-sell during customer interactions.
9. Customer Retention:
   • Invest in customer relationship management (CRM) to retain existing customers.
   • Loyal customers are more likely to make repeat purchases, contributing to a higher contribution margin over time.
10. Continuous Monitoring and Analysis:
    • Regularly review financial and operational data to identify areas for improvement.
    • Use analytics to track the performance of products, customers, and sales channels.

By implementing a combination of these strategies, businesses can work towards increasing their contribution margin significantly, which, in turn, contributes to higher overall profitability and financial sustainability.

In conclusion, there are many ways to increase bottom-line profit without increasing sales and it is best to take a holistic approach by using a combination of tactics including cost management, customer retention, market positioning, diversification, quality improvement, effective marketing, financial management, and employee engagement to get the bottom-line improvements you desire.

In fact, these strategies can help you make MORE profit with LESS sales, which can make your company bullet proof.  Top-line sales may provide you bragging rights, but bottom-line profits provide a long-term, sustainable business model that can be handed down to future generations.