The cost of the materials used to make the product or service you sell directly impacts your profit. This is easy to see, because the less you have to spend to get the product, the more money you get to keep when you sell it. It would seem to many then, that the cheaper the cost of goods sold, the higher the profit. It isn’t that simple though. The following considerations should be made when making an effort to reduce cost of the goods sold.
Negotiate
If your materials are already high quality, the first step is trying to reduce their cost. Negotiate with the supplier for a lower price. Accepting competitive bids, or simply putting out feelers for cheaper suppliers and letting them know may be all it takes. There may indeed be companies out there that are looking to take your business away from another supplier. Take advantage of competition in the marketplace.
One tried-and-true tactic is to see if a vendor will give you a discount for payments made upfront. If you have the cash available, advance payment is a common way of reducing costs. Everything is negotiable.
Eliminate Waste
You may be able to reduce costs by working to eliminate the amount of materials wasted, to the extent that you have control. In a restaurant, for example, reducing portions marginally can make a big difference over time. There is a difference between a generous portion and an enormous portion. Watch your ordering process. Keep good records on the amount of food you are ordering. If you run a pizza shop and are throwing away three-quarters of your mushroom pizza, think about making plain cheese pizzas and then offering mushrooms as a topping with an additional price.
Replace with Lower Cost Materials if Possible
If neither of these work, look for materials that cost less. Be cautious, however. If you sacrifice quality for lower costs, you will not do your business or your profits any favors. Customers tend to not buy products that are not up to the quality standards you have already established. This will reduce profits, effectively canceling out any increase you may have seen from lowering costs.
Know whether your product competes on the basis of value or quality. If you are known for competing on price, quality reductions might not be surprising. If you are dealing with higher class clientele that are used to a certain standard of goods and services, penny-pinching might not be the best idea.
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