A brewery who sold a lot of beer was one day told by the accounting department that if they could just reduce the malt content in their beer and add sugar instead (because sugar is less expensive than malt), that they could increase profits significantly and no one would notice.
The brewery manager found initially that the accountant was right - no one seemed to notice - and they were making more profit. At least for the first year anyway, he found that no one really complained or no more than normal anyway. He did notice however over the next couple of years, that sales kept declining. This was easy to explain said the accountant - after all, people are drinking less than they used to, taxes keep making beer more expensive, and people have less to spend than they used to - and again it seemed the accountant was right.
But the brewery manager was not sure, so he did some investigating and started asking around some of his old customers. A number weren't drinking his brand anymore. When he asked why they said "We don't know why but your beer but just tastes a little different so we thought we would try something else for a change" or "We don't enjoy beer like we used to".
The brewery manager on hearing this, begin to wonder if maybe replacing the malt with sugar might have been a mistake. He checked the figures again and found that this beer sales had shrunk; total consumption of beer across the industry had also shrunk, but to a lesser degree.
He realised that by changing the beer recipe, although they had made more profit in the first year, they were now worse off. (NB. Take a look at the figures and you will see this is exactly what has happened in the brewery industry in New Zealand over the past 50 years. Even before drink driving and other considerations took effect.)
What is the moral of this story? Well, as a business owner, when you seek more profits by reducing your expenses and purchases, it's important to ensure your product or service is not compromised. In fact often you can make it better and charge more. Research shows that 15% of the buyers in a market will buy purely on price alone, but a whopping 85% of customers have other reasons for buying. The 85% is your market. Think about some of your own recent purchases - how often have you paid more for something because you chose to go for better quality or better service.
Here are some areas you should be very careful with when looking at reducing costs to increase profits especially when sales are in decline:
Action Points
1) Identify areas in your business where you should NOT cut costs, to safeguard yourself and preserve the integrity and quality of your product (and stick to it).
2) List ways to increase profits for your business - without compromising on service or quality.
The brewery manager found initially that the accountant was right - no one seemed to notice - and they were making more profit. At least for the first year anyway, he found that no one really complained or no more than normal anyway. He did notice however over the next couple of years, that sales kept declining. This was easy to explain said the accountant - after all, people are drinking less than they used to, taxes keep making beer more expensive, and people have less to spend than they used to - and again it seemed the accountant was right.
But the brewery manager was not sure, so he did some investigating and started asking around some of his old customers. A number weren't drinking his brand anymore. When he asked why they said "We don't know why but your beer but just tastes a little different so we thought we would try something else for a change" or "We don't enjoy beer like we used to".
The brewery manager on hearing this, begin to wonder if maybe replacing the malt with sugar might have been a mistake. He checked the figures again and found that this beer sales had shrunk; total consumption of beer across the industry had also shrunk, but to a lesser degree.
He realised that by changing the beer recipe, although they had made more profit in the first year, they were now worse off. (NB. Take a look at the figures and you will see this is exactly what has happened in the brewery industry in New Zealand over the past 50 years. Even before drink driving and other considerations took effect.)
What is the moral of this story? Well, as a business owner, when you seek more profits by reducing your expenses and purchases, it's important to ensure your product or service is not compromised. In fact often you can make it better and charge more. Research shows that 15% of the buyers in a market will buy purely on price alone, but a whopping 85% of customers have other reasons for buying. The 85% is your market. Think about some of your own recent purchases - how often have you paid more for something because you chose to go for better quality or better service.
Here are some areas you should be very careful with when looking at reducing costs to increase profits especially when sales are in decline:
- Raw material costs for your products (don't compromise on quality - this is why many of your customers buy from you)
- Sales staff (if you don't have good sales staff, then you won't get the sales - especially the high performers)
- Advertising (measure your results first and know which are the winning campaigns before you get rid of the losers)
- Marketing (again measure and stay with the winners)
- Suppliers (know what else is important to you with your suppliers, like quality, delivery times, reliability, replacement policy, etc)
Action Points
1) Identify areas in your business where you should NOT cut costs, to safeguard yourself and preserve the integrity and quality of your product (and stick to it).
2) List ways to increase profits for your business - without compromising on service or quality.
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