The consumer landscape today is very competitive. Businesses believe that they need to think out of the box to win customer loyalty and drive better sales outcomes. However, even then, there could be factors that silently drain the growth potential away. One such major factor is your costing strategy.
If your business is unable to provide quality products or services to customers at a price that doesn’t align with customer expectations, then you have a major problem.
In the complex world of pharmaceutical manufacturing, a leading Pharma firm encountered a significant challenge with its raw material tracking system. The firm was using the same item code for both imported and domestically procured raw material. Each source of raw material came with distinct costs. This discrepancy posed a critical issue: The firm struggled to trace which process line and batch utilized which batch and source of raw material. As a result, the precise impact on product quality and overall cost efficiency remained elusive. Moreover, without accurate tracking, The Firm risked missing out on potential duty drawbacks applicable to specific items (imported source), further complicating their cost management efforts. This scenario underscored the importance of robust tracking systems in ensuring accurate costing and maintaining quality standards in pharmaceutical production.
This was a classic example of failed cost assignment in alignment with product pricing. So, how is a business to know if its costing strategy is fatally flawed?
Identifying the problem is the first step
While it may sound easy to detect, the reality is that many enterprise leaders fail to notice the key warning signs of having an ineffective cost strategy. Let us explore the top 5 business behaviours that might point to a failure in understanding or applying costing:
Dwindling profits
Paying attention to crucial trends in your financial statements is a good way to identify inherent problems in your costing strategy. Despite a healthy sales pipeline, if your business is struggling to see green on the profit column, then there is a good chance that your costing is flawed.
Surprisingly, your finance department may not have visibility into every cost centre in the business. This is especially true if their primary source of information in this regard is the inefficiently rolled out ERP.
If this continues, you will find it hard to find funds to fuel expansion plans, invest in R&D, increase hiring, etc. All these critical elements of business are usually funded by leveraging profits made on revenue generated. This results in a skewed allocation of funds to different operational units.
A failure to adequately accommodate the various nuances in the activities that make up operations could result in increased unaccounted-for expenditure. This will eventually erode the profitability of the business and put other financial plans at risk.
Failed pricing
Businesses need a clear understanding of the value customers derive from their offering and tailor their pricing to ensure that they do not price themselves out of the market. In addition, a poor understanding of costing usually drives poorly strategized pricing. This is especially true in cases linked to new product development or where RFQ responses need to be provided regularly. Pricing that delays or damages deal closures is a good indicator of flawed costing strategies.
If your business team is unable to match customer expectations in prices or is unable to deliver sustainable profit margins when it does meet customer expectations, then there is a clear pricing issue.
Unrealistic prices set for products or services without a clear understanding of the costs involved can result in a gradual loss of sales or poor financial outcomes even when sales goals are met. Both poor sales and revenue funnels for a good product or service are indicators of an inadequate understanding of the cost of the offering.
When competitors win over customers
One of the major reasons why your competitor may be winning over customers despite your offering having an equal or even better product could be that they are priced better. The Indian market is extremely competitive irrespective of domain. It is nearly impossible to find a single brand that rules as the undisputed leader in any segment from salt to luxury SUVs. Many a time, businesses fail to capture the right insights on market dynamics and how they matter in the context of their specific costing factors. This results in their offering a skewed and incompetent pricing structure that makes it easier for competitors to woo their users away.
An inefficient cost strategy will degrade market competence. The business may be unable to differentiate itself from competitors or adopt cost structures that empower carefully considered market moves. This will put them in a tough position when the time comes to navigate market dynamics by offering discounts, special offers, and time-bound promotions.
Failing operational expense optimization efforts
Initiatives aimed at reducing or optimizing operational expenses are now essential in any business. However, if attempts to do so are continuously failing to deliver then the fault may lie not in the optimization effort, but in the costing systems underpinning the decisions effort.
It’s not unusual for many underlying cost drivers to be ignored when evaluating the business’s operating expenditure ecosystem. Insights gained from inadequate standard data are insufficient to drive comprehensive and meaningful cost control strategies because the underlying assumptions are themselves flawed on most occasions.
Even after following these plans, the root causes may well remain unaddressed. This will eventually wreck the effort at worst or deliver underwhelming outcomes at best.
Overcoming a flawed costing strategy
Spotting the weakness in the costing system is the first step towards solving the problem. Leaders need to embrace modern solutions like ABIS-Pro to streamline their costing strategy. To drive lasting change the stakeholders must prepare a strategic roadmap to overhaul cost structures, adopt the right tools and technologies to measure and manage costs, and leave sufficient room for future enhancements.
Getting ahead in the journey of right costing requires a combination of strategy and technology. Businesses can only acquire that through a reliable technology partner like Proactive Solutech. Get in touch with us to know more.