The pandemic has led many companies to search for ways to protect and improve profits. That is understandable, but it can be dangerous. As shown in the chart, there are 3 main ways to improve your profits, which can be subsequently split into 11 profit-growing tactics:
- Attract and engage more customers
- Offer new products and services
- Improve margins
The immediate response, particularly during downturns, is to focus on margin improvement. In particular, reducing discretionary operating costs and even raising prices can rapidly deliver bottom line gains with few immediate downsides.
There are three problems with a myopic focus on margin improvement:
- First, it is unsustainable. You cannot cut your way to growth, so while margin improvement can protect margins in the short-term it does little to drive medium- or longer-term success.
- Second, it can be distracting. As a result of the relatively fast returns from cost-cutting, it can become addictive to managers looking to hit quarterly and annual budgets, almost to the exclusion of other profit-enhancing moves. Ironically, the response of many leaders to diminishing returns from pulling the margin lever is a bigger cost reduction programme.
- Third, it often fails to address your key strategic challenge. While the big challenge for some companies is to lower costs and improve margins, the challenge facing most organisations is to either grow customer engagement or to broaden their business. Responding to these challenges is often harder than cost-cutting and can take longer to deliver results, but it is the only way to deliver sustainable profit growth.
Research from previous economic downturns demonstrates that it is those companies that continue to selectively invest in marketing, brand and M&A activity that perform best both through and beyond a recession.
Analysis by Bain Consulting, for instance, of 4,000 businesses that delivered double-digit growth between 2003-2007, showed a wide range in performance following the crisis. While the losers grew at an average rate of 0% in the period 2007-17, the winners delivered average growth of 14% per annum. Critically, while the losers focused on cutting investment and reducing sales and marketing spend – basically hunkering down during the economic storm – the winners balanced cost management with selective investment for growth, as well as pursuing a proactive M& A pipeline.
There are three ways you can protect and grow profits during this downturn. Which of them are you focusing on to improve both short-term and longer-term profits?
© Stuart Cross 2021. All rights reserved.