Top of the morning to ya!
Topic of the Week: Getting Every Last Drop of Value
I love saving money as much as the next person. There is just something fulfilling about getting every last drop of value out of something.
For example, I’m currently at war with my overpriced face lotion. Each morning, I wake up and think, “Today is the day. Today, I will finally extract the last drop of this organic flower dust and water concoction, throw an empty container in the trash, and celebrate my hard-won victory over this poorly designed packaging.”
My daily battle takes all of two seconds, so the opportunity cost of extracting the last ½ oz of this snake oil lotion is nominal.
However, there are many situations where the quest to extract every last drop of value is a waste of time or damaging to a business. These situations most often arise when investors or management teams attempt to improve profitability margins to extract more cash from a business.
While every business is nuanced, if you think about margin improvement initiatives at a high-level, there are only so many ways to improve margins. Here are the main ones:
1) You can raise prices
2) You can change your product mix in favor of higher margin products
3) You can reduce your costs of goods sold
4) You can reduce corporate overhead costs
5) You can invest in new capabilities that improve efficiency and output
6) You can make your existing people/resources more productive
7) You can generate more revenue to cover your fixed cost burden
Each of these initiatives can be highly effective at improving margins, but every successful margin improvement initiative comes at a cost. It takes time, resources and potential long-term opportunity costs to implement these initiatives.
It’s important to weigh these costs before proceeding with any margin improvement plan.
Have a great Saint Patrick’s Day weekend!