Facing the silent threat of margin erosion, many businesses are seeking strategies to safeguard their profitability in these uncertain times.
Have you been watching the news lately? The challenges are out there – inflation, increasing energy prices, rising interest rates, employee strikes and the list goes on.
A recent study said 93% of CEOS believe we are headed for recession, and most sales professionals I work with say they see their clients starting to tighten their belts. So while it is still unknown whether a recession will actually come, for most of us, for all practical purposes, the recession is already here.
Now more than ever, you can’t afford to let margin erosion eat away at your profits.
What is Margin Erosion, and How Can it Impact Your Business?
Margin erosion refers to the gradual reduction in the profitability of a business due to a combination of internal and external factors. In simpler terms, it's when a company's profit margin decreases over time. While some fluctuations in margins are just a natural part of doing business, consistent margin erosion indicates deeper issues within a business model or the external environment.
And with everything going on today, there is a wide range of external factors that can impact your bottom line. Increased competition, rising costs of raw materials and labor, as well as rising interest rates, inflation, and continued supply chain issues all can have a negative impact on your profit margins. Add to this the fear of recession which can impact your customer's buying habits, and we have the recipe for a perfect storm.
Once customers start to worry about recession, and start to plan for recession, you start to feel their shifts in your business.
How Recession Will Impact Your Customer
The moment that customers think that the economy is shifting, they start to get ready and do business differently. While they are still spending money and still growing their businesses, where and how they spend money starts to change. Understanding this can give you the information you need to both protect your margins and continue to grow your business no matter what the economy does.
Here are five ways the recession impacts customer thinking and actions:
Cash Flow Review
First, they start watching the flow of cash so much more closely than in a healthy economy. They pay attention to not only the money going in, but also far closer attention to the money going out.
Second, they start looking at the contracts, vendors and projects they have in place, reviewing pricing, competitors and asking for better options and terms.
Now vs. Later
Third, they start to ask what projects and expenses need to stay on the calendar and what if any need to be or could be postponed. They ask and question if expenses really need to be incurred and what is lost or gained if they decide to hold off.
Extend Decision Making
Fourth – the decision-making process gets more complicated. More people get involved, and leaders at higher levels have to approve what just last year your contact had the ability to sign off on.
And lastly, they do what you all knew they were going to do- they cut costs whether they are in an industry that is feeling the pinch of a shifting economy or one that is not.
Once the word recession is out there floating in the marketplace, your customers' thinking and buying patterns change, and all of that puts pressure on your growth plans and your margins.
So what are you supposed to do as a business owner or sales professional? If you’re like most, you start to cut costs, looking for your own ways to make your price more attractive than your competitors, and doing what it takes to hold on to the business.
But if you want to thrive in uncertainty, putting heavy pressure on and shrinking your margins is not your best option. Because once you lower your price, guess what your customers are going to want next?
That’s right – another price cut.
So how do you compete, how do you hold margin health when your customers are feeling the pain and making spending shifts in their businesses?
4 Strategies To Stop Margin Erosion
Combating margin erosion isn't solely about tweaking numbers or slashing prices. It's a holistic endeavor that encompasses understanding customer behavior, refining business propositions, and continuously innovating.
It requires a deep dive into how you present your business, how you engage with customers, and how you adapt to their changing needs and concerns.
With that in mind, let's dive into four powerful strategies businesses can leverage to defend against margin erosion.
Redefine Your Value Proposition
The place you need to start is your value proposition. To protect margins and get your price, you need to update and enhance your value proposition. It is a myth in a shifting economy that customers will not spend money. In fact, I think they will spend more, but they will only invest in what helps them solve their biggest challenges.
Once the mindset of your customers shifts, so do their priorities. What they worry about, what they need to protect, where their opportunities are all begin to change, and they are looking for the business and sales professional who can help them navigate these obstacles. Check out my article on how to ensure your value proposition is relevant to make sure yours is up-to-date.
Reevaluate Your Pricing Conversation
If prospects and customers are putting a lot of pressure on you to lower your prices, then the chances are price is all they think you are offering. You need to sell the risk and value – you need to show customers and prospects what “else” they get for your price whether they ask you for that or not.
I have a client who sells software and he was getting crushed by competition looking to price him out of the market. He came to me when his sales team was putting pressure on him to lower the price.
But with so much pressure on his margins, he had no price reductions left. We simply went out and talked to his existing customers and found all types of reasons they chose him over the competition.
His customers actually understood they were paying more for his software, but they felt they were getting the deal of a lifetime. Why? Because of the value – the extras – they gained with his software that his competitors did not offer.
Refocus on Existing Customers
No one understands the value you bring to the table better than your existing customers. If you want to protect your margins, focus on those customers that already do business with you, have seen firsthand the value you bring to the table, and are far more open to buying more.
By going back to your existing customers, you not only stand a better chance of less price resistance, but you will get great insight for redesigning your value proposition, and increasing your opportunities of referrals.
Reexamine Your Revenue Streams
And last but not least, review your revenue streams. Are there products and services your customers are asking for that have evolved from the shifting marketplace? Think of the automobile industry that focuses more on service during economic downturn, and more on new cars during economic growth.
In the face of ever-evolving economic landscapes, understanding and countering margin erosion is more than just a business strategy; it's a survival skill. While external factors may be beyond our control, how businesses respond to these challenges is entirely within their grasp.
By focusing on delivering unparalleled value, cultivating strong relationships with existing clients, and constantly re-evaluating market dynamics, businesses can not only navigate the stormy waters of economic uncertainty but also set a course for sustained growth and profitability.
Just because the economy shifts, doesn’t mean it can’t be your best year on record. But you have to understand how these shifts are impacting your customers, how their challenges change and then reposition your products and services to meet those needs.
You do that, you will not only protect your margins, you will turn all of this uncertainty to your competitive advantage.