Margin optimization

Margin optimization

The aim of every company is to generate profit, which depends, among others, on:  sales made as a result of previously incurred costs, including: costs of purchasing or manufacturing products. However, the sales value itself does not truly reflect the effectiveness of the company’s operations, as the resulting margin may be so low that it will not be able to cover the costs incurred as a result of the activities that have been carried out.

Margin optimization areas

The margin is a basic indicator used in profitability analysis to determine how much and on what a company earns or loses. To efficiently manage margin and develop the most profitable conditions between the company and its clients, a  particular focusshould be placed on four important areas:

Streamlining processes within the company’s structures

Introduction of a more effective pricing policy

Conducting optimization of company costs

Efficient relationship management
with recipients

Improving internal processes is the first step towards improving profitability, which involves analyzing the costs incurred by the company as a result of serving customers and looking for opportunities to improve certain processes in order to implement them as effectively as possible.

In the process of margin optimization, it is crucial to conduct an in-depth analysis of the current situation and identify the potential for eliminating unnecessary activities that generate high costs and are underestimated by customers. It should be borne in mind that customers who buy the most are not necessarily the most profitable customers for the company. The costs of servicing them may be so high that in extreme cases they may generate a loss.

Profitability can be improved by understanding the profitability of each customer and determining all costs incurred in connection with customer service and those that affect customer service, such as costs related to product specification, order size, additional after-sales services (employee training, dedicated representative). commercial), above-average marketing support, customer credit risk, unjustified complaints or the degree of customer automation. Such a catalog can become a starting point for activities leading to improved profitability.

Price is one of the most important indicators affecting the effectiveness and profitability of a company’s sales. The conducted research shows that over 60% of enterprises can increase their profits by at least 5% as a result of more effective product pricing, and a 1% change in goods prices brings an increase in the margin value of up to 11%. A well-chosen pricing model is an effective tool for building a competitive advantage. An effective pricing policy can be implemented as a result of, among others: differentiating discounts granted to buyers or by valuing the additional value received by the recipient and including it in the sales price.

In the current conditions, with high competition, improving profitability requires maintaining cost discipline . Some companies treat cost discipline as a search for savings by reducing budgets. However, it should be remembered that sales service costs increase as the scale of sales increases, and simple cost reduction may at some point lead to a barrier to further cuts. Expenditures should be treated as an investment that is incurred in order to provide the best possible customer service and deliver a product that meets expectations and which should bring the company the highest possible rate of return.

Appropriate customer relationship management is manifested by using all opportunities to cooperate with the customer in order to improve profitability. The sale of a basic service does not have to be highly profitable, but it can become a starting point for establishing broader commercial relationships that will lead to the sale of additional services with high profitability.

The margin optimization process is very complex and should involve employees from various departments, including sales, production, logistics and finance. Despite the difficulties, it is worth the effort because it provides a solid foundation for improving the company’s results and its long-term development.


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