A Strong Brand Generates Greater Profit Margin
Many small and medium companies judge their financial well-being by whether or not, after paying bills and payroll, there is money left over at the end of the month. When it consistently works out this way, it is a good thing. But other than the owner's subjective view, there is little to determine if the company is indeed healthy. The most effective guide that you can use to compare your progress to either a previous time period or that of your competitors/industry is profit margin.
There are two profit margins to be concerned with -- gross and net. Gross margin is determined by using the following formula: (sales - cost of goods sold)/sales. Because this takes into account cost of goods sold, it indicates how well management utilizes labor and/or manufacturing in the production of its products or services. Net margin takes into account every aspect of the business, including taxes paid. This figure indicates how well the managers run the entire business. Its formula is: net profits after taxes/sales. Determining these numbers on a monthly and yearly basis instantly shows you where you currently stand, in which direction you are headed, and how much you can afford to spend on marketing, capital improvements, etc.
Following is an elementary example of how two competitors may be positioned to proceed in the coming year based on their profit margins. Although gross profit margin is an important indicator, we will focus on net profit margin in this example because its reflection of the overall business, and this is what is most essential to smaller companies.
Let's say each company had $1 million in sales for last year. Company A's net profit after taxes was $185,000, while Company B's was $100,000. Their net margins were 18.5% and 10% respectively. Both of these are healthy, but Company A has a significant advantage. Not only does it have more cash at the end of each month and year to use as it sees fit, it is positioned to be more flexible. If Company A hits hard times -- downturn in its industry or loss of key employees -- it can absorb revenue loss and still remain profitable as contrasted to Company B's situation. In fact, at 18.5% net margin, Company A could have revenues of only $541,000, and it would still have a net profit of $100,000.
So where does that leave Company B? Well, at 10% net margins, it would have to increase its revenue to $1.85 million to have the same available cash as Company A. Or it could work to increase its margins, and that's where branding comes in. Now let me preface this by stating that there are other factors that may also be limiting margins. Perhaps the cost of space is too high. Possibly equipment is outdated and inefficient. If these are the causes, they must be addressed. However, no matter what the causes are, branding still helps increase margins.
Branding works on many fronts to accomplish this. First, it incorporates every contact that a company has with its customers and potential customers. It puts forth the message that the company wants its audience to see and hear in a well-manage, concerted manner. Second, by having that message put forth a unique value proposition, it eliminates much of the company's competition in the minds of its audience. Both of these increase sales efficiency.
The branding process often narrows the pool of prospects as well, making marketing efforts more concentrated, more accurate, and therefore, less costly. And what happens when you have more effective marketing efforts at lower costs? That's right ... greater marketing ROI (return on investment) and high margins. As a friend would say, it's a beautiful thing!
Take the time to track your margins. Compare them to those of your industry. You'll be amazed at what you learn about your company's health. And more importantly, you will be able to determine your best path to greater success.
