Many entrepreneurs and business leaders believe that offering cheap or low-priced products is the key to increasing sales and business growth. However, this misconception has led many businesses into financial trouble. The truth is that the price you can charge for your product or service is determined by your target market. It’s important to consider whether it’s worthwhile to focus on markets with low-profit margins, as high turnover is necessary to offset the low prices.
It’s also important to recognise that if you are operating in a low-price market and rely on manual labour for production or services, you will end up paying low wages for a lot of effort and earn very little. In essence, you’ll be labelled as exploiting your workers. Instead of labelling products or services as cheap, it’s better to consider the affordability of the target customers. For example, sachet milk may seem inexpensive, but it’s designed for people who can only afford to buy small quantities at a time. Therefore, simply setting a low price does not guarantee success.
I believe that focusing on low or high-profit margins is more important than setting low prices. I strongly discourage operating with low-profit margins, as it’s difficult to succeed in such markets without significant cost reductions and high turnover. Engaging in low-margin businesses can often feel like philanthropy, but it’s unlikely to be appreciated by customers who simply see you as a businessperson.
If you had to choose between being a business that makes $1 billion in revenue and $1 million in profit, and a business that makes $20 million in revenue but also $1 million in profit, which would you choose? The answer isn’t straightforward. The first business could reduce costs and increase profit, but the second business generally requires less stress. If it makes more sense to engage in high-margin business, why don’t more people do it? First, they think it’s tough. Second, it’s hard to understand a market you’re not part of. People typically sell what they would buy. To successfully thrive in a high-margin market, you need key steps to follow.
Understand That High-Margin Markets Exist
Many entrepreneurs assume high-margin markets equate to high-income markets. But if you’re given land at N100,000 and resell it at N200,000, most of your buyers may be low-income earners, but your margins aren’t low. Conversely, you might resell a luxury item and, due to the difficulty in selling it, end up making only N20,000 because you had to reduce your commission just to close the deal. High-margin markets exist, and the reason you may not know about them is that, if you had a business enjoying high margins, it would be your best-kept secret. Recognising that high-margin products and markets exist inspires you to move into such a market or transform your product into such a product.
Low Cost Is Your Best Friend
Low cost doesn’t mean low wages. In fact, the lower your costs, the better wages you can afford to pay. Low cost means eliminating waste and unnecessary expenses. Why book a flight and hotel if a meeting can happen on Zoom? If your market is online, why print flyers? If your customer is offline, why do a sponsored ad on Facebook? If your customers need to trust you, do you need an office space or a money-back guarantee? Many global businesses operate in Nigeria without an office space. If it takes five hours for five labourers to produce 100 cases, but a machine can do it in 10 minutes and there’s potential for expansion, isn’t the machine a better deal? You can shift your business from low margins to high margins. Low cost is the key to unlocking high margins.
High-Margin Markets
In some cases, costs are fixed. The solution isn’t lowering costs because doing so would compromise quality. The solution is to change who is buying and how the product or service is sold. It’s unfair to raise prices and try to justify the increase to customers who cannot afford it. No matter how well you explain why a Gulfstream jet needs a price hike, a person earning minimum wage still can’t afford it. So, if you need to raise your price, realise that in some cases, you’ll also need to change your customer base. High-margin customers exist. For example, farm produce is cheap in the North but more expensive in Lagos and the South. Meanwhile, PMS is cheaper in the South and more expensive in the North. This isn’t about high-income customers; it’s about people willing to pay more because of their circumstances and access to the product. The same foodstuff that is expensive for someone in your neighbourhood might be cheap for someone in the UK or the USA importing from Nigeria. A company experiencing losses will easily pay three times my normal fee to get back to profitability compared to a profitable company, which may see making more money as cool but not urgent. The company with losses has less money but is willing to pay more.
High-Income Customers
High-income customers are targeted when business leaders want to increase their margins, but they also cost more to serve, even if the margins are good. Selling luxury items requires a lot of luxurious packaging and customer service. The ROI is great, but achieving this level of service is expensive for many businesses. However, luxury is easy to create on social media and digitally. Your social media presence can project luxury or appear cheap. Your digital footprint can also exude luxury or feel inexpensive.
Creative Adjustments to Boost Margins
To increase margins, you must understand what you can remove from your product, process, or system without compromising customer utility, while also reducing costs. A customer of mine reduced the width of their product but improved the taste. The reduced width significantly lowered costs compared to the cost of improving the taste, resulting in a 70% increase in sales and a 20% increase in gross profit. Smaller sachets can also work wonders if tested in small markets and customers like the idea. It’s an easy way to make more with less. As a consultant, you might stop offering on-site training, which requires you to provide food and accommodation to trainees but yields minimal profit. Taking the same training online can lower costs for the customer while increasing your margins. There’s a reason why restaurants favour online orders over dine-in customers: same product, lower cost. Similarly, there’s a reason why top universities embraced online courses with their prestigious logos. It’s less expensive for students, creates incredible margins for the university and is scalable.
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Feature Image by Libasse El-Arbi Ndoye for Pexels
