Decrease Costs vs. Increase Revenue

Is it more important for your business to decrease costs or increase revenue?

This is a recurring question for business owners, and there’s no one best answer for all businesses. So how can you decide whether to focus on lowering your costs or increasing your revenues?

 

Understand the Metrics of Profitability

It certainly helps to understand the basic metrics of profitability, especially the difference between profit and profit margin. If for example you reduce your fixed costs this should lead to a one off increase in profit, whereas a reduction in your variable direct costs should result in an ongoing benefit.

Keep an Eye on Quality

When a business focuses exclusively on one metric (decreasing costs, for example), they run the risk of compromising quality. If you lower the quality of your products or services in an effort to decrease costs, you could inadvertently degrade perceptions of your brand, and this can have far-reaching consequences.

 

Evaluate Your Current Processes and Conditions

If you’re currently operating at a comfortable level with room for decreasing costs or increasing revenue, you may be able to make adjustments without too much discomfort. If you’re already operating near maximum efficiency, however, decreasing costs may not be a reasonable goal.

Consider where you might have room for changes. Are you already getting the best possible prices on materials? Have you negotiated costs for your facilities and for personnel? How competitive is the pricing in your industry? Is the economy in your market booming, or is it depressed?  Can your processes be improved or can technology be employed to improve efficiency or capacity? All of these factors will influence whether or not there is room for decreasing your costs or increasing your revenue.

 

Consider Improving Your Branding

One way to increase your revenue is to improve the strength of your brand. If you can establish an identity for your business that commands higher prices, you may be able to increase your revenues significantly. 

Creative, effective marketing can have a huge impact on your branding, and many businesses find that their brand becomes very valuable over time, perhaps even more valuable than individual products. Create a unified marketing campaign that addresses customers’ needs, and flood the market with your images and messages.

As you make decisions about decreasing costs and increasing revenue, consult with an adviser who can help you to understand how these adjustments will affect your overall business operations.

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