This is one of the lecture of my last course in marketing to which I had paid attention and it was worth it. The theme of the lecture was different strategy to increase profitability for the company. The measure for profitability that was considered was return on investment (ROI).Though I am not convinced whether we can consider ROI as true measure of profitability but still I consider the strategies are worth mentioning. There are four techniques which are employed by the companies namely:-
1) Cost Efficiency: - I don’t think this strategy needs much explanation. Entire outsourcing is based on this fundamental. We reduce the cost and thereby boost profits and thus ROI increases. South West Airlines is very good example of this strategy.
2) Premium pricing: - This is very common point reiterated in all marketing lectures. It is always taught that company should differentiate itself and charge premium for the same. This strategy has been successfully employed by Sony in the past and now Apple.
3) Increase Turnover: - This strategy needs some explanation. Above two are very common and it is very easy to find their implementation. Let us consider very simple example where in I manufacture a pen for Rs 10. I sell a dozen in week at Rs 15 each. So one week ROI is 0.5. Now instead of that now I sell a dozen in half week at same price. Then at end of the one week my profits would be twice at same level of investment. Thus now my ROI has increase to 1. Here we have assumed that you manufacture again by investing amount received by selling first dozen and have ignored time value of money of extra profits earned (Rs 60). So in nutshell this strategy suggests to increase working capital turnover and thereby increase ROI. Note there is no correlation between profit margin and ROI here. Most of the FMCG companies have implemented this strategy successfully.
4) Cash management: - This also needs very detailed understanding. Very good example of this is DELL. One can sell goods lower than the cost price and still have positive ROI if it implements this strategy. Here you charge your customers upfront and provide service/goods later i.e. receivables upfront and payables are delayed. You actually have negative working capital. So now for people weak in finance might wonder how could this increase your ROI and many would be startled by having negative working capital. But we you pay closer look you are using your receivables to fund your company thereby decreasing the investment required so net result ROI increases. DELL successfully employed this strategy and changed entire competitive landscape of its industry. So if someone asks you that can you make profit by selling lower than cost? Think twice before you answered that question.
I wonder I can still remember the stuffs. That’s great.
3 comments:
The first 3 are run of the mill strategy
I like the last strategy... This was actually a revelation. When it was taught, we were pretty amazed as to how Dell could make money by selling items lower than CP.
regarding point 3 -
‘Now instead of that now I sell a dozen in half week at same price’
I feel you should make this example more clear by assuming you sell just half a dozen in half a week.. That way there is clarity in that all though you are selling the same dozen over the week, its the turnover which is making the difference..
Other than STP, the only other important thing I learnt in strategic marketing!! I was baffled !!
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