To improve profitability, the first thing I’d advise business owners to do is price up their offering. In the vast majority of cases that I see, the products and services offered by entrepreneurial businesses are under-priced, for the value they provide.
Of course, in certain markets price is particularly sensitive. Sometimes that’s just the nature of the particular product that’s being sold. But on the whole I’d question the sustainability of the business with so little scope for change and adaptation, and wonder what disruptive competitor may be around the corner.
Either way, one effective way to overcome price pressures is to launch a new proposition. This can increase your profit margins in two ways. First, by appealing to a customer niche that will pay higher prices or by selling products that are perceived as more valuable by your current customer base. Secondly, because you can double up on many of the overheads that you’re already committed to with your first product – office space, management time, staff, software and technology, etc – the overhead costs of product two will be lower, making profit margins on each sale higher.
New products broadly fall into two groups: add-on products or entirely new products. And there can be good reasons for either. An add-on or higher-value product allows you to maximise your current customer base and sales channels whilst selling a more profitable product. It also makes sense because you already have the expertise embedded in your business. It’s a gentle way of diversifying but can really improve your sales by upselling to existing customers.
On the other hand, if you look at the capabilities and experience of your team and your business in a broader sense – in terms of processes of how you create, sell or deliver a product – there might well be new products, even in entirely new sectors, that you have the capability to deliver. For example, the team behind the successful snack box delivery company Graze were also behind the DVD rental firm LoveFilm (purchased by Amazon for $200million some years ago). While one sells food, and the other rents movies, it’s not the product they’re selling, but the logistics and marketing expertise that was core to the success of both.
But what if you’re in a position where you feel you can’t change your product, nor your pricing? Instead of looking over your shoulder for that disruptive competitor all the time, be the disruptor. Self-cannibalisation as a business strategy can be risky. But it’s also risky to stand still and wait for someone to steal your business – which will happen if you’re not continually innovating and building defendables.
Product diversification has the double positive impact of introducing a better margin element to the business and reducing dependence on the low margin part of the business that competition intensifies. Developing a culture of innovation in your team also brings its own benefits. As your business and your team become more innovative they become more capable of dealing with potential competitor threats, reacting rapidly, and thinking ahead of the curve.