BUSINESS PLAN

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MARGINS AND SALES VOLUME

Module 4 Case: Margins and Sales Volume

Margins and Sales Volume

Introduction

Pricing margins and markups are the first steps in determining how profitable a product or service is. Pricing margins are significant factors for the success of a business. Therefore, producers, manufacturers, or service givers consider the margin when determining how to price their products. A producer might wish to earn as much margin as possible, but the price must be at a competitive level.

Industry Description

The lead logistics provides comprehensive solutions to coordinate and integrate all supply chain members using information and communication technologies (ICT) and are often specialized consulting companies. Lead logistics industry manages supply chain solutions providing end-to-end logistics services. The lead logistics industry has experienced a paradigm shift over the last few decades. Revolutionary change has happened from how manual operations were done to more technology-based operations. Many companies have tapped into the innovation space to better services provided to customers, optimize investment, and cut unnecessary costs. These businesses can either be small establishments only serving the neighborhood, regional to serve a country and probably its strategic neighborhood, or global with footprints worldwide. Integration of Information Technology (IT) systems in the logistics industry has significantly improved efficiency. In lead logistics, a consultation can be sought and offered over the internet without necessarily physical presence.

Margins and Markups

The pricing margin of a product or service is the difference between the cost of the product or service is offered to customers and the cost of acquiring such product or service (Demuynck & Parenti, 2018). For example, if a service provider incurs $1500 to provide a service, then charges the service for $1800, the margin is $300, also referred to as profit margin. Markup is computed as a percentage difference between the selling price and a product or service cost. For example, if a service sells for $1800 and costs $1600, the additional price increase is ($1800 – $1600) / $1600) x 100 = 12.5%.

Lead logistics experience relatively large margins worldwide as compared to other industries. Being non-assets based, no revenues passed to the carrier, thus even higher margins. Per service rendered, the margins in the US are between 15 – 25%. It is worth noting that the jobs are not many and a quite time-consuming, limiting the number of contracts a company can take up over a specific period. In 2015, the average grocery industry margin was 16.5 percent (Tozanli, 2017).

Economic factors that affect Markups

In any industry, margins and markups are vital indicators of business performance. The business operators should therefore be able to interpret each of these indicators and make sound decisions correctly. Factors affecting markup include;

i. Degree of competition. A firm operating in a monopolistic environment will have little or no competition. The demand is inelastic, and therefore, the firm can increase margins and markups through increasing products and services prices. Notably, government regulations limit how a firm can increase services prices. Likewise, if competition is very high, the firms will lower their prices; thus, markups become minimal. The lead logistics industry operates in a space where competition is low; thus, prices are relatively high to cover for the limited contracts.

ii. Demand strength. When demand is high due to limited supply, products and services prices go higher. This leads to an increase in profits margin and, therefore, markups. Strong demand indicates high markups, while weak demand leads to low profit, thus thin markups. The lead industry operates on high demand and low supply; thus, the prices on services offered are relatively high.

iii. The economy state. When an economy is growing, most products and services are in demand as consumers have money to spend. This, therefore, means purchases are done in volumes, thus increasing markups. During the recession, money is in limited supply. Businesses will therefore realize minimal sales and so low markups.

iv. Advertising. A successful advertising campaign can increase product or services demand. This will mean people will purchase the product or seek them in large numbers, increasing the profits margin. Lead logistics companies can realize increased margins by running advertisements in dailies or television. Lack of advertising makes a service less identifiable, thus reducing its demand.

v. Exchange rate. For firms relying on exports, depreciation in exchange rates means more profits. The firm will be purchasing at lower prices while still selling at the initial prices. This increases the markups. Appreciation in exchange rates squeezes the profit decrease in markups.

vi. Services substitutes. A service whose substitutes are expensive will tend to have high demand. Resulting in more sales and an increase in profits margin. When the substitutes are many, the prices will be low, leading to a decrease in profits margin and markups.

vii. Relative costs. Profits will decrease when related costs increase. For instance, when the cost of acquiring relevant software to under carrying a consultation contract increases, the profits decrease. An increase in productivity from improvement in technology will increase profits which will, in turn, lead to more markups.

What marketing techniques can companies use to support the pricing schemes that support their margins?

i. Implementing e-commerce. From the experience of pandemic shutdowns, sales over the internet have grown tremendously. Businesses with an online presence have leveraged their capabilities and increased their portfolio. Businesses can therefore embark on online sales to grow their sales, thus boost profits margin.

ii. Automation of business systems. This improves efficiency in addition to cutting down costs. Profit’s margin will increase as more will be sold from efficiency. Such processes to automate may include inventory management, payroll processing, and bookkeeping. This releases staff to work on other tasks.

iii. Communicating with customers. Establishing a relationship with the business customers increases customer patronage. This helps businesses gain valuable knowledge about the customers through such interactions. The customers will end up purchasing more and being loyal, thus supporting the business profits margin.

iv. Investing in advertising. This increases business and products visibility. Though resources are spent on advertising, it increases sales and, in turn, more profits when successfully done. The best way of marketing will be determined by studying the target market and the product type.

v. Raising products or services prices. Businesses can generate more profits by raising service charges, increasing the gap between buying and selling costs. This technique is, however, unpopular in the modern economic climate.

vi. Cutting costs. Profit is the difference between the selling price and incurred costs. When a business reduces the costs incurred, then the profit margins increase. This technique should not compromise the product or service quality as that might bring undesirable effects. Ways of cutting costs may include; negotiating for cheaper supporting tools, adopting technology, and improving processes efficiency.

Conclusion

In any business establishment, profit is a significant drive. Business owners will come up with different ways to maximize profit for larger markups. These techniques should be controlled in such a manner that they do not lead to unethical business practices.

References

Burns, Justin (2017). Revenue falls, but earnings and operating profit up at DHL. Air Cargo Week.

Demuynck, T. & Parenti, M. (2018). A price index with variable markups and changing variety. Research series.

Tozanli, O.; Duman, G.M.; Kongar, E. & Gupta, S.M (2017). Environmentally Concerned Logistics Operations in Fuzzy Environment: A Literature Survey. Logistics.