Don't you believe it... cutting costs boosts profits

In the face of an economic downturn, slashing costs is the classic ploy - one that many firms are now pursuing. The accepted wisdom is that this will protect profitability, but it's often wrong. Here are two common profitability problems that won't be fixed by cost-cutting:-

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Last Updated: 31 Aug 2010

Fudged pricing strategy. In any market, some customers will pay extra for value, while others will just want the lowest price. You can't satisfy both. Either your costs are too high to make money in the second segment, or you aren't spending enough to provide the value that the first one expects. While markets were buoyant, you probably got away with this, but now it's decision time. Either organise everything you do to be the lowest-cost producer, becoming the Ryanair of your industry, or spend money on differentiating yourself and go for the added-value approach.

Unprofitable customers or products. More common than you'd think. I recently analysed a newly acquired product portfolio in a manufacturing company and found that 16% of it was making no profit at all. And I have worked with a logistics company, one of whose big contracts was losing 20% of revenue.

In cases like these, reducing costs won't help. You have to roll up your sleeves and get into the detail. It's not enough to look at average margins - they can hide a multitude of sins. Look instead at profitability across individual lines and businesses.

Cutting costs is simple, and it makes it look as if you're tackling the problem. But if you let it become a knee-jerk reaction, you could end up kicking yourself in the face.

Alastair Dryburgh is head of Akenhurst Consultants - www.akenhurst.com.

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