Mini Case Study: How to Do More Than Break Even

There are a lot of businesses that look super successful from the outside but are barely breaking even. Just because a business is always busy or is great at what they do doesn’t mean they are profitable. While revenue is an important factor for any business, low margins will always leave you working hard but standing still.  

One of my biggest surprises was working with a business that looked like they were doing everything right. They had great offerings and lots of demand. The owners were completely exhausted, though, because no matter how hard they worked they were just barely breaking even, leaving them stressed and disheartened. In our initial conversation we identified a huge problem: they didn’t know their costs, and their pricing was based on a “vibe”.  They were essentially guessing what people would be willing to pay based on their competitors’ pricing and what they themselves would want to pay. These are good elements to include in pricing analysis but are not enough to run a successful business.

To tackle their margin problem, we created a clear framework for assessing the cost for every single thing they offered. Once we had reliable costs in front of us, it was obvious why they were working so hard to break even. Three of their top revenue drivers were barely priced above cost, and they even had one item priced below cost.

Getting a line of sight to cost meant we could be intentional with their pricing. We set margin goals to make sure all their prices were at or above a healthy margin, then sorted their current pricing into 3 main buckets:

1)      Healthy Margins: Keep price and cost.

2)      Low Margins: Change price, keep cost.

3)      Low Margins: Keep price, change cost.

These three buckets let us get focused on what had to change for each item. Making these changes gave them control over their margins for the first time ever. It also provided visibility to future profit expectations.  

The price updates resulted in slightly lower revenue over 5 months but 13% higher profit, meaning more money in the bank. This exercise emphasized the need for recurring review of their costs as well as a system for tracking margins. Now, they don't have to hold their breath and hope they break even at the end of each month. They know what to expect and can control their own profitability.