Value over Volume
- Gary Martz
- 6 hours ago
- 2 min read
"Profit is like oxygen, food, water, and blood for the body; they are not the point of life, but without them, there is no life." — James C. Collins
Profit is not just a goal and a method to measure success, but a necessity in business. There are two broad approaches to maximize profits: High volume sales with lower margins; or high margin sales with lower volumes. Clearly, there are situational external and internal variables that impact the approach that is best for your business.
The goal of this blog is to focus on the power of higher margins, sometimes called value-based pricing. Companies first need to establish for the customer the Stop selling hardervalue of their product or service, so that the customer perceives the higher value it is receiving. Some, not all, customers are willing to pay for higher value, whether in quality, faster delivery times, ease of order entry and other tailored offerings that meet their specific needs and wants. To provide elevated products and services, companies need employees that are engaged and dedicated to meeting higher standards for their customers. In summary, the business needs to create the right internal environment to support value-based pricing.
The mathematical leverage provided by value-based pricing and higher margins derives from covering fixed costs faster, so that the rest is pure profit. In the volume-based strategy, each extra unit produced increases variable costs as well. Plus, a volume drop or an increase in costs, which is not passed on to the customer, further erodes a high volume, low margin strategy.
Higher margin businesses can better survive economic volatility and downturns with less volume, but low-margin, high volume business must execute at high efficiency with flawless performance to maintain profits.
In Gary’s time at Greif, a global leader in industrial packaging, the shift to value selling, or emphasizing value over volume, has been critical to profitability, particularly in the global industrial recession that has existed for the past three years. Greif focused on customer needs and wants, as well as directing resources to employee satisfaction, product quality, and sales training.
At ADR & Associates, an engineering consulting company, there were situations where employees wanted to provide new clients with low introductory prices to “get them in the door” and then increase pricing. Doug realized the danger that in many cases customers would expect those low prices in the future and not perceive any difference in value for more expensive services later. ADR would then be locked into doing more business with the customer at perpetually lower margins or losing the future business. You need to manage every margin situation intentionally.
The article above-linked by Matt Eichmann, Founder of Catalyst Point Leadership Advisors, discusses the power of the value-based selling approach and how to lead your sales force to support this strategy.
M2 Capital Advisors can help you with the strategy and resources that are best for your success.