Guest: Dan Smytka, a coach at CEO Coaching International. Dan has global expertise in growing and leading multibillion-dollar businesses with marquee brands such as General Electric, Carrier, and Goodyear Tire and Rubber. Dan has also led businesses in Asia and Europe where he cultivated a reputation for generating profitable growth, building high-performance collaborative executive teams, and executing strategies to expand profit margins and deliver sustainable results.
Quick Background: Since the beginning of the 2023 annual planning season, we’ve been coaching CEOs to plan for a volatile economy. Recession or not, this is no time to get complacent.
On today’s show, Dan Smytka discusses specific strategies that will help you keep moving products, delivering services, and expanding your profit margins during challenging times.
Keys to Expand Your Profit Margins from Dan Smytka
1. Attack your COGS.
“What a leader fears most is complacency,” Dan Smytka says, “getting too comfortable with what is considered normal. Certainly today’s uncertainties give a call for urgency and understanding your business and the situation it’s in.”
Dan believes that CEOs need to start their profit plan for the rest of the year by focusing on what you can control. Number one is cost of goods sold (COGS), both in terms of your gross margins and the essential structural costs of running your company.
“As you think about how to make your cost structure more effective, make sure you start from your customer’s viewpoint,” Dan recommends, “and work your way back into how you are serving your customer versus a more internal view of understanding your cost structure and ultimately how it impacts your customer. If you have costs that are being valued by your customer, opportunities to enhance the effectiveness and, more importantly, the efficiency of those costs come down to understanding where you can make choices around what it is that you want to control or not want to control. I’ve seen tremendous opportunities for outsourcing effective parts of customer costs in a way where that value is delivered at a higher standard than any company would be able to deliver themselves. It allows the company itself to focus on what it’s really good at doing and let go of things that it may not do so well for the customer.”
For many businesses, customer support is an obvious target. If a third-party outsourcing company, detailed FAQ page, or — coming sooner than you think — AI chatbot can deliver answers your customers need, then why are you staffing a phone bank 24/7? And if you don’t think these solutions would work for your company, then it’s likely your best practices aren’t standardized, scripted, and repeatable enough.
Another top target is warehousing and distribution. The pandemic was a painful reminder of how important it is for companies to find that sweet spot between supply and demand. Err on either side, and you risk driving customers to competitors who aren’t out of stock, or sitting on a warehouse full of unsold product.
“Customers really aren’t paying a company for its inventory,” Dan says. “And inventory comes at an enormous cost. It’s cost of space, it’s cost of working capital, interest payments, and people power to move that inventory around. Look at how you link demand flow in real-time to your production to almost have a ‘make-to-order,’ being able to add feature content to a product that already exists in a rapid response. Truly, inventory’s not something that’s valued unless it’s creating value.”
2. Optimize your pricing strategy.
“The market itself is going to be defined by target market segments,” Dan says. “I think it’s very important that firms understand what target market segments they want to serve with their value proposition. That will set their pricing strategy.”
In other words, just like analyzing your COGS, it all starts with the customer. Are you servicing a niche that will place extra value on a product that’s 100% made in the U.S.A.? Then customers won’t blink at the price increase that comes with onshoring your manufacturing back to the States. Are your customers more value-conscious, especially with interest rates and inflation running high? Keep your prices low, but don’t get sucked into a “race to the bottom” with competitors. Instead, let your revised pricing strategy spark innovations that the customer will value.
For example: more seasoned CEOs might remember the days when we operated household appliances with physical buttons, knobs, and other mechanical parts. Switching to electronic controls was cheaper for the companies Dan was leading, but electronics were also better for customers because there were less moving parts to break and repair. Lower costs for the appliance industry, higher value for customers.
In our current environment, Dan also encourages CEOs to be more innovative with pricing itself. We’re rapidly approaching an era in which AI and machine learning will be able to create dynamic pricing models tailored to every customer based on supply, demand, and even what that customer can afford. Prep for that future by breaking down some of your basic assumptions about how and why you charge what you charge. How can you create more repeat business from irregular customers? How can you incentivize your most important customers to stock up? And what kinds of minor costs — a free month of service, a buy-one-get-one promotion — could turn prospects into clients?
“You need to understand what customers generate value for your firm, and make sure your pricing strategies align well to that value,” Dan says. “For customers that aren’t as strategic, I think you can take more risk in your pricing and you can experiment with that through smart pricing discipline. I think the services side will unfold nicely with a lot of the AI technology that’s coming into play to align itself more to demand patterns. A lot of firms put an enormous amount of effort in driving their cost position and cost structure, but not a lot of resources on pricing. It’s almost as if the market sets the price. I think the firm can set the price by understanding the value that they’re delivering and making sure that that value is differentiated in a way to where customers will pay more for it.”
3. “Mix” and match.
Just as some of your customers will always place value above all else, you will also have customers who always put a premium on luxury, excellence, and world-class service, recession or not.
Unless you’re the Patek Philippe or Ritz-Carlton of your industry, your product and service mix should appeal to customers across the spectrum. But high-performing companies also use their mix — and the data behind it — to figure out how to drive more customers to products and services that result in a higher gross margin.
You might need to retrain your sales team or change incentives to focus on more profitable products and services. You might need to work with your marketing team to refresh your brand and messaging to be more aspirational or community-focused. You could vary your mix and your pricing strategy by region to account for different shopping and spending habits from state to state, country to country.
And you’ll definitely have to reassess your plans for key accounts and create some leading KPIs that you can track, measure, and manage on your way through tough times on your way to BIG.
“I think in times of uncertainty, it’s really important that you focus on what you think are the critical drivers for your business,” Dan says, “and to make sure that you’re doing scenario planning around those drivers as to what various outcomes may happen. A lot of that is high-case, mid-case, and low-case. Understanding the assumptions around those cases gives you more control in periods of uncertainty than just being a victim or having to respond to uncertainty.”
1. Put your customer first. Your pricing model is dependent on what customers will or won’t pay for your products and services.
2. Try something new. Dynamic pricing, subscriptions, memberships, bulk discounts, introductory offers — analyze every option and find the ones that complement your goals for the year.
3. Make every sale count. Incentivize new customers to come back and nudge recurring customers towards BIGGER purchases that benefit you both.
About CEO Coaching International
CEO Coaching International works with CEOs and their leadership teams to achieve extraordinary results quarter after quarter, year after year. Known globally for its success in coaching growth-focused entrepreneurs to meaningful exits, CEO Coaching International has coached more than 1,000 CEOs and entrepreneurs in more than 60 countries and 45 industries. The coaches at CEO Coaching International are former CEOs, presidents, or executives who have made BIG happen. The firm’s coaches have led double-digit sales and profit growth in businesses ranging in size from startups to over $10 billion, and many are founders that have led their companies through successful eight, nine, and ten-figure exits. Companies working with CEO Coaching International for two years or more have experienced an average EBITDA CAGR of 53.5% during their time as a client, more than three times the U.S. average, and a revenue CAGR of 26.2%, nearly twice the U.S. average.