If you provide goods or a service to customers, what sets you apart from the competition? How consumers perceive an organization’s value is the driving force behind profitable companies. Understanding value can help your business redefine its cost structure to create higher profit margins.
Your business might increase value by outsourcing payroll to a tax accountant freeing up time to devote to customer service. Or perhaps your tax CPA can review your P&L statement with you to find areas where you can cut down on supply costs to create more profit. To better grasp the relationship between value and cost structure, let’s take a detailed look at each of them separately.
What is the cost structure?
The cost structure of a business refers to both the fixed and variable costs of operations. Fixed expenses for most companies can include:
● Labor costs and wages
● Warranty claims
● Customer service overhead
Fixed costs are recurring payments that do not change according to the flow of business. Variable costs, on the other hand, fluctuate according to the services provided and the volume of business. Variable costs can include:
● Materials and supplies
● Returned products
● Discounts and credits
● Employee bonuses
Both types of costs are used to determine what the break-even point is for a business’ budget. They also dictate a baseline pricing for products and services when using the cost-based pricing method. If your cost structure isn’t giving you enough of a profit margin, there are ways to add value to your business to improve the bottom line.
How can I add value to my existing cost structure?
To add value, you first need to understand your business’ value proposition. The value proposition is how your customer base views the goods or services your company offers.
A well thought out value proposition will convey to your customers how your promise of value is unique to your brand. It will entice them to choose your business over other, similar brands.
You can create value for your customers in a variety of ways. Some examples include: emotional marketing campaigns, establishing flat fees for services, or offering promotional benefits to your loyal social media followers. However, it is crucial to begin by providing a quality product or service that addresses a want or need for consumers.
By increasing your brand’s value in the eyes of your clients, you can affect the variable costs associated with your cost structure. Better value means happier customers, which can translate to more repeat buyers and lower return rates. Once you have an established customer base, you can reduce the amount you spend on direct marketing and promotional discounts. All these actions lead to decreased variable costs, creating higher profit margins for your business.
It is quite possible to make some minor adjustments to your company’s current operational methods to increase profit margins. Buying cheaper supplies or cutting back on the number of employees you hire are inadequate ways to try and boost revenue. Reducing the value of your business like that hurts the bottom line in the long run. You can instead, use value to redefine your firm's cost structure in ways that increase value along with profit margins.
At Caro & Associates, we want to help you with all of your accounting outsourcing needs. With our services, you can begin to lower your variable costs and increase your profit margin, all while having the confidence that our team will take care of your bookkeeping needs. Call us today at (206)-497-0671 and let our advisors help get you started.
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