Chartered Professional Accountant Rodney Davis of GreySuits Inc., a strategic accounting firm, speaks about staying ahead of the competition, keeping salaries competitive, and why a pricing strategy isn’t the only solution.
Q: From a financial perspective, what’s the first step on staying ahead of your competition?
Rodney Davis: There are several ways we’ve approached this, and different scenarios require different approaches. But the first entry point for that discussion is understanding what drives profitability for that organization, and in driving profitability for an organization. I always break them down into what drives revenue and what part of the cost structure is fixed versus variable when you get a dollar of revenue. And then understanding how much revenue I have to drive to cover the fixed component. Understanding the variable component is first and foremost. Now we can have any conversation about costs, in the context of that paradigm and sometimes the labour component is a variable, or a portion of it is variable, or sometimes that labour component is entirely fixed. In which case there are other components that drive the variable nature of how their business costs move as a function of how their revenues go up and down.
Q. How do you keep salaries competitive?
Rodney Davis: The short answer to that, is understanding that labour is a cost component of how your business makes money. I have one client whose business is sales. They have a team that operates out of a central sales room. And those salespeople have to sell. And the salespeople want to earn a particular salary, but it’s management’s job to bring the leads or to bring the opportunities for those salespeople. The labour component of that is not the person who’s doing the job. It’s the person who is making that labour decision and whose job to make sure that they’re paying the right amount to get the right resource into that role. When there are superstars, who are worth more in the marketplace, it’s sometimes better off to pay them, to keep them. Because losing them can have an effect throughout your organization. Conversely, you may be better off letting them go, if you can’t turn that into revenue and profit for your organization.
Q: Why shouldn’t you just default to a pricing strategy?
Rodney Davis: A lot of times, operators get lucky. They’re in a very margin rich business, and so they start to convince themselves that they actually are great at pricing and great at margins. They give up margin and get the sale. The problem is, as competition comes in, the first thing that they do is chip away at that margin. So, if you don’t have a better strategy other than price, you better hope there’s a high barrier to entry. Because eventually people will go where the easy money is, and price can’t be your only system in a sustainable model. One of my clients was in the retail gas business. It’s highly competitive. The entire marketplace makes price decisions and are constantly undercutting each other on price. They just assumed that price was the differentiator.
But we created a pricing database, where every week we would organize and implement a review of all of the major competitive gas stations representative of the market. Interestingly enough, we learned fairly quickly that there were four different pricing quadrants in that market. And each of those quadrants had a higher or lower elasticity of customer sensitivity to price. We then identified within those quadrants how you best price against the competition. And by putting the customer into that mindset, over a two year period, we achieved an annual increase in their bottom line of $2 million by changing the conversation from purely price to understanding which markets had greater elasticity, which markets had a greater customer service driver; and which had not been contemplated previously. Customer service did drive some of the decision-making and it completely changed the way that they looked at their market competition and changed the way that they priced their business.
Rodney Davis, CA, CPA is a partner and practice leader at GreySuits Advisors Inc. (www.greysuits.ca) He has been working with private and public organizations since 1990 in change management.
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