Managing Margins

Today I met with a group of top notch advertising agencies to discuss how to enhance their business model and build great client relationships. The challenge is that with the recent economic issues, the dynamics of the industry have changed–and they are unlikely to go back. How do you maintain margins in a value driven economy?

The only way to maintain or grow margins is to establish a value beyond costs. In other words, offer a benefit that others don’t match.

The definition of value is “worth what is paid”. If what you offer can’t be seen as different, you will compete on price. If what is different can’t be defined and/or measured, you will compete on price.

Let’s take two quick examples:
First, the advertising agency value is more than the cost of the postcards for a mail campaign. It is about the creative idea, and the way the idea supports the overall brand. How do you know what the “soft side” of marketing is worth? It must be measured in a mutually agreeable manner. So, if the mail campaign drives a response that exceeds industry standard, it is creating a value beyond the cost of the mail piece. That result must be captured and built into pricing but remember, it also becomes the new expectation. Delivering average results is the commodity; delivering beyond average results is worth a little more.

How about a manufacturer of injection molded plastic components used in food packaging? Commodity, right? It certainly can be. However, if the product comes with tech support that enhances productivity of the production line, or reduces scrap and spoilage, there is an extra value. If customer service satisfactorily resolves every problem quickly and with a helpful spirit, there is a value to that.

Improving margins requires having a clearly defined value proposition unique to your company and consistently delivered to customers. The value delivered must be meaningful and relevant to customers–they must agree it is indeed a value before they will pay for it. Being a low cost provider is a strategic choice; but if that is not YOUR strategy, define a value that customers will pay for and deliver it! Margins will benefit!

(Originally published:  June 2, 2011)

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