“Am I making enough sales to fuel my growth?”
This is one of the most common questions startup founders and entrepreneurs ask themselves when growing a new venture. It’s only natural – securing a customer base and cultivating a share of the market is vital in the early days of business.
After all, those customers will provide you with valuable feedback that will help you to refine your product or offer. And it’s those insights that will help you understand your audience better, allowing you to grow your market share intrinsically.
But when it comes to scaling a profitable business, it’s not the right question to ask.
Take one of our clients for example…
After launching a product in the tech/SAAS space, the CEO became hyper-focused on sales as a metric for success. What better way to show board members and investors the progression of the business… or so they thought. Constantly worried about negative cash flow the CEO focused solely on selling more units to close the gap..
What they failed to account for was how much their overhead expenses were affecting their bottom line.
Before they knew it, after factoring in direct costs such as COGS and sales commissions they were dealing with a gross margin of just 12%.
(For context, a good benchmark gross margin for a SaaS company is over 75%.)
So, instead of asking themselves “Am I making enough sales to stay afloat”, the real question our client should have been asking was:
“Am I making enough profit to fuel my growth?”
In other words, it’s great you’re selling. But are you making any money doing it?
Yes, in the early stages of company growth you want to focus on acquiring customers and market share. But you also need to have healthy margins to fuel growth and opportunities, grow a team, and invest in product development and marketing.
And without a healthy gross margin, you simply won’t have a viable business—at least, not for long.
What is Gross Margin?
Your gross margin is calculated based on the amount of money available after taking your total revenue and subtracting the cost of goods sold (COGS) or the amount it cost your company to produce the goods or services that it sells.
This means factoring in the cost of items such as labor expenses and raw materials with indirect costs and operating expenses—including administrative costs and sales commissions—to track your profitability trends.
Not only does this help you measure how efficiently your business is running, but it also allows you to compare your margins to industry standards and develop a pricing strategy that fuels growth and profitability – not just sales.
How Can You Improve Your Gross Margin?
You’ve probably heard the saying, “you need money to make money,” right?
When it comes to improving your profit margins, it holds true.
Theoretically, as your revenue increases, your cost of goods sold should rise proportionately. But if your cost of goods sold increases faster than your revenue growth, you’ve got a profitability problem.
And in our experience, this is usually due to underpricing.
Listen, we understand the pressures of not wanting to outprice yourself. But far too often our clients are actually undervaluing their product or service offering.
If your cost of goods sold has increased but you haven’t raised your prices to reflect that change, you’re doing your business a disservice. Remember, you are providing a great deal of value to your customers and prospects. And your product development and future innovation rely on your ability to make a profit.
This is why at Howbridge we work closely with you to develop a pricing framework and revenue strategy that captures the value of your product or offer while maintaining your profitability and competitiveness.
If you can’t afford to pass 100% of your cost increases onto the consumer, we’ll work with you to identify key components to improving your gross margin, including improving the cost of getting your product to market. Maybe that means moving locations, sourcing a more affordable parts provider, or finding innovative new ways to distribute your product at a lower cost.
Sure, there are other important financial markers to pay attention to when growing your business, like operating profit margin and net profit margin, but improving your gross margin will undoubtedly lead to more cash flow.
And increased cash flow almost always translates to growth…
That growth could come in the form of capital expenditures, potential M&A, improved liquidity, higher debt ceiling, inventory growth to match market potential, and even increased earnings per share.
Want to learn more? Let us show you how to bridge the gap.
Get in touch with Howbridge today to book a discovery call and let’s see how we can help improve your gross margins and increase your profitability.
Our teams have real-world experience in scaling successful, profitable businesses. We can help you understand your margins so you can set the right revenue goals and objectives and bring your ideas to market successfully.
Howbridge is a growth advisory firm that helps companies take the next step to market leadership.