Know Your Costs
At Deion Associates & Strategies, Inc., we often have the opportunity to assist clients with a review of product/service costs. Here are just 2 examples.
Example One:
Susan was responsible for the pricing/purchasing at a local veterinary clinic. While reviewing some of the laboratory costs for one of the tests that they frequently provided, she noticed that the invoicing for this test from their outside lab indicated that it was not part of the discount pricing plan. She researched further and discovered that this one test was really multiple tests included into one lab pricing module. When she queried the Vets as to why they were ordering this specific test, she was told that of the 5 tests performed in one module, it included 3 of the test results that they were looking for, and that it was easy to order this “one test”. The cost for the lab test was $55.00 and the suggested retail price to the customer was $122.00.
Upon further review, Susan learned that the 3 specialized tests results that the Vets were looking for were part of the discount pricing program from the outside laboratory. The net total cost for ordering these 3 individual tests was $26.50, and the net suggested retail price to the customer for all 3 tests combined was $122.00. All that needed to be done was to take one blood sample from the pet, submit it for 3 different test results/analysis (which was extremely easy to do on the lab supplied computer ordering system. The Vets would get the results they were looking for, the Clinic would obtain the required tests results at a discounted price,....and the charge to the customer would remain at the industry accepted suggested retail price.
Previous scenario analysis:
Retail Price: $122.00
Cost: $55.00 45%
GPM $67.00 55%
New scenario analysis:
Retail Price: $122.00
Cost: $26.50 22%
GPM $95.50 78%
The net impact is that just by changing the test ordering process, the Clinic realized an additional GPM of $28.50 per test. Since the Clinic performs this test approximately 600 times per year, the total net increase in GPM is $17,100 per year.
This was just one test! Susan went on to review all of the other tests, costs and pricing as well. When she was done, without increasing any pricing, without increasing any services, Susan was able to save the clinic almost $120,000 per year in lab billing costs. This was equal to one full time Vet salary, so, they hired another full time Vet, expanded their services and hours,....and then revenues really took off!
Example Two:
Sam the carpenter provides some excellent carpentry work for his clients. On one of his projects/designs he uses 1X6X4 select pine boards for his carpentry work. He would normally purchase these boards at the local lumber store for $4.25 per board. Recently, lumber prices went up by 30% resulting in a new cost per board of $5.52. His competitors had already started to pass this increased cost on to their customers. Sam thought this would be an excellent time to become even more competitive, but he didn’t want to lose money in the process. He researched the possibility of purchasing larger length boards and cutting them down to 4' sections. What he discovered was this:
4' boards @ $5.25
8' boards @ $8.52
12' boards @ $13.65
16' boards @ $18.62
Since his design work didn’t actually require an exact 4' board (it could be a tad shorter) he looked to see what the actual cost would be if he purchased longer boards and cut them down to size. What he discovered was this:
4' boards @ $4.25 (old price)
4' boards @ $5.52 (new price)
8' boards @ $8.52 /2 = $4.26 per 4' section
12' boards @ $12.76 / 3 = $4.25 per 4' section
16' boards @ $16.98 / 4 = $4.24 per 4' section
By purchasing longer boards and cutting them down to size, Sam was able to either keep his costs the same, making the same profit as before the price increase, or, increase his prices but far less than what his competitors had to increase their prices to meet the new costs, realizing an increased profit margin. In either case, simple creative thinking allowed Sam to remain cost/price competitive.
What ultimately did happen is that Sam researched further, and realized that if he purchased bulk, unfinished lumber, and if he invested in some planing equipment, he could actually plane the raw wood to whatever exact size and dimension he wanted, ultimately significantly reducing his cost of materials.
Sometimes, researching and sourcing your raw materials might lead you to some simple cost saving activities, or, they might lead you to alternative modes of business. Oh, by the way, Sam’s business has expanded,....he’s now processing “made to order” lumber for many of what used to be his competitors. And, he still continues in his carpentry work,...but the lumber processing work is soon to exceed the carpentry revenues.
*******
These are just 2 examples we have come across and have assisted with. At Deion Associates & Strategies, Inc., we encourage our clients to look at different ways of doing things, better sources, better processes, novel approaches. You don’t always have to increase your revenues to increase your profits. You might be able to make more money doing something different. You might be able to make more money from the customers and clients you already have. Sometimes, everything you want or need is right in front of you. Order a different test, or, order a longer board of wood. Sometimes it helps to “turn on the light”!!
If you would like to further discuss this process, don’t hesitate to contact us at: Deion Associates & Strategies, Inc.
