Why Focus on Gross Margin to drive Profit & Scale?
We focus on Gross Margin because GM directly drives profitability; you maximize sales price and minimize purchase price. Basic. But there is another higher reason; stable, improving gross margin is the truest measure of a health of a business. For a consumer product company, a sustained improvement curve of GM demonstrates Operational Discipline and brand/sales/customer/competition strength.
Optimizing gross margin is vendor-facing and customer-facing. The vendor-facing activities include, ability to react to macroeconomic conditions, pricing negotiation capabilities, factory control & performance, warehousing performance, transportation optimization and more. The Customer-Facing drivers include, brand strength, sales price strength, sales discounting, customer-product fit, competitive landscape and more.
Private equity and investors love a business with sustained gross margin improvements.
Discovery Questions
Show your Gross Margin financials.
Are your products multi sourced?
Where do you manufacture your products (country)?
Do you have Bill of Material (BOM) pricing that shows factory costs by detailed material cost, by labor (fixed and variable), by overhead, by transportation cost, by factory profit, by duty backflush?
Do you have year over year (YOY) cost reductions targets for your factories?
When was last time you negotiated factory costs? Are your factories aware that you are looking for annual cost reductions? Is there a cadence to these factory negotiations?
Do factories sign up to pay you for quality defects? How do you manage that program?
Have you launched a new independent factory to allow cross factory negotiations? Do you even know if you are paying too much?……
Plus 40 additional questions…
