Margin erosion is typically a symptom of:
1) The buyer (client/customer) does not recognize the value of what they are purchasing
or
2) The sales force (your company) does not identify clearly the value of what they are selling (service or product)
Particularly in B2B companies the sales force and in general the entire organization tend to rely on a “cost plus” calculation whereby the CFO and their controlling team calculate an industrial cost and then add the applicable margin (which is very often ~50%) . While the model worked well when the company was growing it often reaches a plateau or ceiling at which point the model is “broken” for lack of a better word.
At the point where the organization recognizes that the model of cost plus pricing is no longer functioning correctly it is often assumed that the company is “no longer competitive with Low Cost Countries (i.e. China/India)” or that it is time to embark on a “cost cutting initiative”. While it is valuable to revisit cost structures and business models on a regular basis the above assumptions are frequently a case of jumping to cause. The root cause may be simply that customers are no longer recognizing the value of what your company produces and provides as both products and services.
What can you do about the problem of customer recognition for value? The first step in correcting margin erosion is to understand what a client actually will pay a premium for- what is it that makes her or him want to spend more money with you as compared to a competitor or substitute? Think for a moment about the simple example of Fedex where it can cost up to $80/60 EUR to send a simple envelope from one continent to another- why would anyone pay that when the local postal service is usually available for less than $2/1.50 EUR? This is a great starting point to discuss with your management team who are typically frequent FEDEX customers.
When Margin erosion is occurring the first step in the equation is to understand both the root cause and the margin “premium” customers are actually prepared to pay for.
