Do you realize that if a coffee shop owner raises their price 5 cents per cup, it more than covers a price increase per pound of $2.50! I have been in this business for 27 years and I have never seen anyone increase their prices by $2.50 pr/lb! So losing customers due to price is the last thing that should happen. First you have to educate your customers that the products you are selling to them are not the same! This is a key factor in dealing with price wars. Sure you can by XYZ's coffee for .25 cents per pound cheaper but you are not going to get the same product that you have, and often times built your entire business on. This has to be stressed, over and over again. Take the price out of the conversation. So that is rule number 1 in maintaining your gross margin. But let's take a look at what else you can do to reduce your overhead costs and increase your profitability.
#1 Outsource, Outsource, Outsource!!
If you are running a production facility it is simply not necessary to have all your employees, be your employees. Yes you should always have key positions that are your direct employees, such as your Production manager, but as far as packing line help or shipping employees, equipment repairs, even customer service people, no no no! Use temporary employees whenever and wherever possible! This does 2 things. It obviously reduces your payroll but it also reduces benefits you must pay to them such as vacation, health insurance, payroll taxes, etc.. Even accounting, you don't need a full time accountant on your staff, especially if you are a small to medium sized business. I would recommend buying quickbooks and doing it yourself or what I did, was that, and then pay a CPA, preferably a sole proprietor, not a firm, come in once a month and generate your P&L and balance sheet for you. You will save a ton of money by doing this, and you aren't sacrificing anything in the short or long term!
#2 - Write RFP's for everything!! Get at least 3 quotes on anything you do, whether it is office supplies to packaging materials to health insurance etc..., the more quotes you get the better.
#3 - Always back end a sales person's annual salary! A sales person who can live and pay his bills on his/her base salary is suicide! Give them a reasonable base salary, but give them no ceiling in incentives where they can earn for writing new business and the payout should always be based on a formula and percentage of what the company is going to make on the new business! This again limits your payroll and all associated expenses a business must pay to keep employees, as well as highly incentivizes the sales person.
#4- Constantly evaluate your product offerings and don't be afraid to eliminate all slow moving items! This cuts your inventory carrying costs as well as increases productivity in production. Remember time is money and the less time your production line has to change over it is costing you money!
#5 - Automate everything you possibly can! That includes mail. Hire a mail service that scans all of your mail and gives you the ability to access it from anywhere. The last thing you need is someone in your office manually opening the daily mail, it makes no sense. These services are readily available and extremely cost effective!
#6 - Reduce your DSO with beneficial credit terms. If you can effective reduce your days sales outstanding you will immediately see a measurable increase in your cash flow. So whenever possible push your customers to pay within 10 days with a 2% incentive. Simply put, get the money as quicly as possible. On the other hand, utilize the same tactic when paying vendors, you would be surprised how much you will save annually paying quicker with a cash discount!
These are just some simple rules to incorporate in your business. This works in many businesses not just coffee obviously. I was just using this as an example.
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Leary Consulting LLC