The main elements of the company’s bottom line must be understood by a manager. The focus and impact on the changes must be prioritized in order to you have a bigger impact on the profit.
The profits were doubled by Amazon during the pandemic. Amazon doubled its net profit from $2.6 billion in 2019 to $5.2 billion in 2020. Before this figure was calculated, the company spent $4 billion dollars on “incremental covid-19 related costs in the quarter to help keep the employees safe and deliver products to customers” according to Bezos.
To the executives’ surprise, Amazon customers didn’t just buy low-profit goods like groceries (whose sales managed to triple year over year in the quarter) but also purchased more profitable “softline” category goods like clothing and “hardline” category goods like electronics. This helped the company eclipse the previous $3.6 billion profit that they earned in the first quarter of 2019 and in turn, set a new record profit.
Strategically Managing Profits – by Increasing Sales Revenues
Either of the upcoming methods can be used to manage profit
1. Increasing Sales Revenues
- In order to achieve long-term profitability, increasing sales revenue is a common approach.
- Internal resources can also be used to achieve sales revenue.
- Organic growth is an approach where internal resources are used.
- Companies can merge with other companies in order to increase sales revenue.
- However, the most prevalent sales growth strategy is organic growth.
The two approaches in this context for increasing revenues are
1. Increasing Sales Revenues by – Growing Sales Volume
Market Growth Strategy
This attracts customers that are new to the category and in turn, increases sale volume.
Example – Ferrero, in 2018-2019 registered a healthy sales growth since it was buoyed by the Indian customer’s love for sweets.
Steal Share Strategy
This is a strategy that attracts customers who are already using the competitors’ offerings in order to increase sales volume.
Example – Burger King’s “Whooper Detour” steered people away from McDonald’s – using geofencing and promoted their redesigned app.
Market Penetration Strategy
A company can also increase its sales volume by increasing the number of products purchased by the company’s own consumers. or by attracting new customers to the offering’s category.
Example – Amazon.com
2. Increasing Sales Revenue by – Optimising Price
- Setting the price is the most important part of managing sales revenue.
- It is dependent on the customer’s reaction to the changes in price.
- On the one hand, increasing the price can increase profit margins and have a positive impact on profit, but on the other hand, it can also have a negative impact and decrease sales volume since buyers might not associate with the high price.
- The price can be lowered in order to increase sales revenue; the negative impact of the decrease in profit margins is lower than the positive impact of the increase in sales volume.
Example – Amazon Changes Prices
- The prices of products are changed by Amazon 2.5 million times in a day.
- This means that the average price of the product listed on Amazon changes every 10 minutes.
- This is about 50 times more than Best Buy and Walmart.
- Even though a lot of customers are annoyed when the price of a product drops immediately after they buy it, this tactic has also helped increase Amazon’s profit by 25%
Strategically Managing Profits – by Lowering Cost
Managing Profit Growth by Lowering Cost
Lowering the cost is an alternative strategy to grow profits.
The cost of a company can be divided into four parts
- Cost of Goods Sold
- Research and Development Cost
- Marketing Cost
- Miscellaneous Costs: Such as General and Administrative Cost and Cost of Capital.
1. Lowering the Cost of Goods Sold
- The cost that is directly related to creating the services and goods to be sold is referred to as the cost of goods sold.
- These can be both fixed cost and variable cost.
- The cost of turning raw materials into goods and the cost of raw materials is the variable cost.
- The cost of fixed equipment like all the costs of fixed assets and the depreciation of all equipment is called fixed cost.
- The two ways of lowering the cost of the goods sold are:
- The cost of inputs that are used in the development of the company’s offerings like labour, raw materials and logistics can be lowered.
- Using alternate technologies that are cost effective, switching suppliers and outsourcing are some ways in which this cost can be lowered.
2. Lowering Research and Development Cost
- Research and development cost is another cost that can be lowered. The fixed cost there is important for designing the company’s offering is research.
- A significant portion of every company is dedicated to research and development.
- Adopting technologies that shorten the development cycle of products, managing labour costs and reducing the equipment cost can be a way to decrease this cost.
3. Lowering Marketing Cost
- The business models of many companies have higher costs that are dedicated to marketing.
- A very large portion of the overall costs of companies like Coca Cola is reserved for marketing.
- Customer focus promotions such as coupons, price reductions, sweepstakes, rebates and premiums are included in this.
- Advertising in various media like radio, television, online, print, event advertising, out-of-home, point of purchase, PR expenditure and digital marketing all fall under communication expenditure.
4. Lower Miscellaneous Cost
- In addition to decreasing the cost of research development expenditures, marketing expenses and the cost of goods sold, the company also needs to decrease its miscellaneous and other costs.
- These prevalent strategies can be used to lower company’s costs along with lowering administrative costs and legal costs by companies to gain economics of scale.
- Walmart slightly tweaks how the business runs and saves millions of dollars.
- By changing the process of the purchase of shopping bags, $60 million is saved annually by Walmart.
- It makes the vests worn by its workers with recycled materials and in turn cuts its cost by 15%
- Walmart is trying to centralise the way it maintains its equipment and increase its energy efficiency and in turn saving $100 million annually.
- Walmart said previously that it saved $20 million by changing its floor wax.
- It also saved $200 million by changing the light bulbs in its parking lots and stores.