When your business is doing well, you probably don’t even think about your costs. After all, why try to fix something that isn’t broken?
But when things change (economic conditions take a turn for the worse, or consumer sentiment weakens), then chances are they become the number one concern for you and your management team.
Whenever someone gets in touch with us to help turn their business around, we find the problem is usually costs—not prices. Sometimes the problem is they’ve reduced their costs too much, which can do even more damage to a business that’s already in trouble. For example, cutting back on marketing or R&D could reduce the business’ turnover and market share even more.
But most of the time, the business’ costs are too high compared to its competitors.
Here are six reasons your business may have higher costs than your competitors, and what you might be able to do to lower them:
1. Economies of scale.
If your business is small, or just starting up, you may not yet be producing large quantities of your product. And that means your per-unit fixed costs may be relatively high.
By ramping up production, and increasing the number of units you produce, you can lower your per-unit fixed costs. (The two are inversely proportional.)
2. Total cost disadvantage.
Your competitors may have lower costs because they have influence over whoever provides them with raw materials. They may also be taking advantage of cheaper infrastructure, lower wages, or local tax laws.
You may be able to lower your costs by striking a deal with a local provider (e.g. cheaper prices in return for large orders for materials/services on a regular basis). You may also be able to find cheaper premises, or find a way to pay less tax.
3. An overly-diverse cost structure.
An overly-complicated cost structure often needs complex corporate overheads to look after it. And that may be costing you more than it’s worth.
By simplifying your cost structure, you may be able to reduce your corporate overheads and save yourself some money (not to mention a few headaches).
4. An inefficient management style or organisational structure.
A manager who relies heavily on resources may be costing you more than the value they bring to your business.
By moving their work to lower management lines, or streamlining (if not automating) the work of the head office manager, you may be able to significantly reduce your management costs.
5. Operational inefficiencies.
High costs can often be associated with:
- inefficient productivity
- poor production planning
- lack of maintenance
- poor resource allocation (sales, marketing, production, R&D, etc.)
- unfavourable terms of trade
- out-of-date office systems and procedures.
Analysing and streamlining/delegating/automating your business processes could lead to much lower production costs.
6. Unfavourable government policies.
Sometimes your costs can be attributed to factors that are outside of your control—taxation, foreign exchanges, regulations in different jurisdictions, and so on.
In these situations, you may just have to accept that your competitors’ costs in these areas will always be lower, and look for ways to reduce them elsewhere.
As you can see, there are quite a few ways you can reduce the cost of doing business. And if you take action now, then the next time your business is doing well it will be doing really well.