Margin compression is a term that refers to the effect of increasing costs and decreasing margins on product or service prices. In a highly competitive market, companies are forced to reduce their prices. This results in lower profit margins. The cause of margin compression can be competition or even increased costs from suppliers.
There are two types of margin compression: direct and indirect. Direct margin compression occurs when the price of goods and services increases, while indirect margin compression occurs when overhead expenses increase.
Margin compression can come from many different sources: it might be that a competitor has entered the market, or it may simply be that your product or service has become more common and therefore less valuable. In any case, there are things you can do to increase your profit margins despite this pressure.
Here are just some of the ways you can combat margin compression -
- Increase your price/ reduce your cost of goods sold (COGS)
- Diversify your products/services
- Target high-margin clients
Let us dig deeper to get a better understanding of these crucial factors.
Increase your price/ reduce your cost of goods sold (COGS)
To run a successful company, you need to watch your finances. Analyze your most spending patterns to find areas where you can cut back on expenses. If possible -
- Try renegotiating or switching contracts and suppliers for better terms
- Look for ways to increase revenue without increasing spending, such as offering incentives for customers who buy in bulk
- Scrutinize your expenses to save money and increase revenue
- Switch vendors or renegotiate contracts as a valuable first step. New opportunities to improve arrangements arise at regular intervals, so it's useful for business owners to stay abreast of upcoming deadlines
Diversify your products/services
If possible, try renegotiating with vendors or switching suppliers; if your spending is locked in with contracts, see if any opportunities are coming up when you'll be able to negotiate better terms. Changing suppliers may also lead to long-term savings, especially if you can buy in bulk.
By offering unique products and marketing them in a way that highlights their differences from the competition, you make it harder for people to find lower prices than what you're offering.
The more you can diversify your products and services, the less likely you are to experience margin compression. This term refers to a situation in which the growth rate of costs is greater than the growth rate of revenue. As a result, your profit margin shrinks. Diversifying your product and service portfolio helps you reduce this risk by spreading the income and other costs over more factors.
Target high-margin clients
One thing you have control over is which clients you target. So instead of just targeting anyone and everyone who might buy from you, try focusing on the high-margin clients. You'll make more money from them and enjoy less price competition, which will help you curb margin compression.
In most cases, a client requesting a product or service from your company will have their own specific needs that may not be common across your other clients-after all, every business is different. Some clients may want a product or service that is unique to them. While these highly individualized products or services can be precious for your client, they take time and resources to provide properly—and thus reduce your profit margins.
By focusing on high-margin clients who require minor customization of your work, you can maintain or even grow your profit margins while still meeting the needs of your target market.
The best way to recruit and retain these high-margin clients is by understanding what they value. Typically, these clients will be more interested in the quality of your product, rather than its price. In other words, they want to buy the best product they can, even if it costs more than they could spend elsewhere. Therefore, you'll want to focus on providing a top-tier product that justifies its premium price.
Of course, these recommendations are not easy to accept. In the long run, openness helps businesses survive in hyper-competitive and challenging markets.
Outsource Mortgage Processing to FWS
At Flatworld Solutions you get guided to the best end-to-end financial solutions for your business needs. With our services, lenders can improve their margins even in a highly competitive market by using the strategies mentioned above.
If you are looking for a reliable and cost-effective mortgage support service provider, then you have come to the right place. Get in touch with us to add more value to your products and services.