When I’m retained for Direct Marketing consulting the first question that I ask is, “are you offering a product or service that is sold or bought?” The second question I ask is, “what are your margins, in other words what do you sell your product for and what does it cost to make it?” You’d be surprised how many businesses are failures just because of bad margins.
If you are not at a 5:1 mark up from sales price to cost (in your business model) you are fighting yourself and the odds of success in any business. I discussed this in length at Brad Richdale wikipedia in July's 2011 column along with my column on direct to consumer medical marketing and direct to consumer medical device marketing
I know a man who began a boutique type sandwich shop while he was in college. He later expanded his chain throughout the west coast and eventually sold his chain of sandwich shops for a massive amount of money. He made his fortune counting nickels and pennies. To me that accomplishment is amazing. He is an amazing operator and an incredibly astute analyst of costs and margins in a business where you have spoiled goods in conjunction with a plethora of menu choices. What’s my point here? Simply this I’m not interested in counting pennies and nickels I’ve done it before and it usually ends in disaster.
The standard restaurant operating margins are 4:1 and guess what? Most restaurants fail due to low margins. You have to be a genius to make it all work in the restaurant world. You will notice where you can see meals being prepared (for the most part) that the portions are allocated precisely for this very reason. Remember you are also dealing with a perishable commodity.
On the other hand take the pharmaceutical business; their margins are monstrous, sometimes 100:1. You don’t have to a genius to make it work when you are in the drug business especially when you are selling a solution (a product that is bought). What do you think the profits were on Viagra (the first drug for erectile dysfunction)? They dumped millions in free samples and in TV advertising. Doctors I know said market demand was off the charts. On top of that Pfizer gave free samples out like candy on Halloween. In months the business was rocketing to the stratosphere.
Would you rather be in the restaurant business or drug business? I can’t stress this enough most people I’ve met that had a failed business failed because of low margins whereas most people with huge margins have hit out of the park. Sure there are low margin successes and there are high margin failures but they are the exception to the rule.
If you are barely getting by in business it probably has a lot to do with low margins, whereas if you have high margins you can grow out of cash flow; margins matter.
