As a business owner, keeping your costs under control is an essential aspect of managing your enterprise. There are two crucial components to consider when it comes to your products: the price and the cost. Setting the right price for your product is dependent on having control over your costs.
To illustrate how controlling costs can lead to success, let's consider an example from the laboratory testing industry. Before entering this industry, a savvy entrepreneur conducted extensive market research to identify the actual costs involved in providing laboratory testing services. He discovered that vendors were buying raw materials for $5 and selling them to laboratory companies for $100, who in turn charged customers $500 for the same test.
By disrupting the market with a price of only $100 for the test, this entrepreneur was able to increase his volume, confidence, and network. This success led to the establishment of a new startup that became a reputable brand.
For small business owners looking to grow their enterprises, it is recommended that they keep the prices of their products low. This strategy has been shown to be successful, as no company has closed down due to low pricing. Conversely, many companies that have high-priced products are unable to control their costs, leading to their closure.
In addition to keeping prices low, it is crucial to have a comprehensive understanding of your costs. Knowing your Cost of Goods Sold (COGS) is essential for doing business. However, if you can also determine the COGS of your products, as well as your vendor's COGS and the profit they are making, you can bring price disruption and become a successful entrepreneur. In other words, having a comprehensive understanding of your costs and your vendor's costs can give you a competitive advantage in the market.
Make your products more accessible
As a business owner, it is always important to find ways to reduce the price of your products without compromising on quality. One effective way to achieve this is by introducing the Buffet System in Laboratory Testing for the first time. This system involves providing packages of 50, 60, and 80 tests, such as ABC-1.1, ABC-1.2…to ABC-X, which cost between $500 and $3000. For instance, the package of $3000 includes 115 tests.
By offering these packages, customers can get free tests in addition to the tests they require, all at the same price. This not only reduces the cost of collecting a specimen and taking it to the laboratory but also allows for up to four additional tests to be conducted for an extra cost of only $10. With this concept of packages, the cost of performing tests has decreased, and customers can receive extra value that helps retain them.
It is essential to note that there are two types of customers in the laboratory testing industry: those with diseases and those with disorders. In the case of diseases, people experience symptoms such as fever, pain, inflammation, and require sick care. On the other hand, disorders do not cause any symptoms, but they affect a person's quality of life. They mostly result from changes in lifestyle, and preventive care is required.
In developed countries, preventive care accounts for 50% of the market, while in developing countries, sick care was 100% in 1990. However, today, preventive care in developing countries is 10%, while new start-ups have a preventive care market of 50%. Therefore, if you are in the biomedical business, it is essential to focus on preventive care. This way, your customers will be normal people, not sick or hospitalized individuals.
Focusing on preventive care increases the market size and repeat customers. As a business owner, it is crucial to control cash flows. One way to achieve this is through attracting franchisees by offering them a low-priced franchise and good margins. If your business takes $1,00K as advance from franchisees and gives them a credit limit of $50K, it means that you are investing the franchisee's money in the market, not your own. This method is called negative working capital, and it allows your business to have a negative working capital of $20K, so you do not have to take a loan from the bank.
In conclusion, reducing the price of your products is an effective way to attract and retain customers. However, it is essential to control your costs to ensure that your business stays afloat. Focusing on preventive care instead of sick care can also increase your market size and repeat customers. Lastly, managing cash flows is crucial for any business, and using negative working capital can help you avoid taking out a loan from the bank.
The Fine Line Between Growth and Destruction
Within the realm of business, gross margin serves as a crucial performance measure. Essentially, this metric represents the difference between the cost of goods sold and the revenue generated from sales. It is a key indicator of a company's profitability and is often used to assess its financial health.
It goes without saying that a company's gross margin should be high enough to cover its operating expenses, such as rent, salaries, and marketing costs. If a company's gross margin is too low, it will not be able to generate enough profit to sustain its operations in the long term. As such, it is imperative to focus on increasing this margin in order to ensure that the company remains viable.
One of the most effective ways to increase gross margin is to optimize machine usage. For example, if a company has a $1 million machine that is only used for two hours per day, it represents a loss. However, if the same machine is used for 22 hours per day, it can generate significant profits. Therefore, it is important to make the most of the resources at your disposal to maximize your profitability.
In addition to optimizing machine usage, there are several other strategies that can be employed to increase gross margin. One approach is to reduce costs. This can be achieved by negotiating better prices with suppliers, streamlining operations, or reducing waste. Another option is to increase prices, although this approach needs to be handled delicately in order to maintain competitiveness. Selling higher-margin products is another possibility, which could involve shifting to a more premium product line or offering additional services.
It is important to bear in mind that a company's gross margin is critical to its success. Without a healthy gross margin, expanding a business is akin to building a house without a foundation. It is important to ensure that you have a healthy gross margin before considering expansion. This can be achieved by employing various strategies to increase profitability, such as optimizing machine usage and reducing costs.
Ultimately, the key to success in business is volume. By keeping prices low and controlling costs, it is possible to attract advance from vendors and increase volume. This, in turn, can enable a company to bargain with vendors, keep employees engaged, and generate profits. In summary, expansion without gross margin is committing suicide. It is essential to focus on increasing gross margin in order to ensure the long-term viability of your business.