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Alright everybody we’re ready to talk about the super sexy topic of improving gross profit margins which I think is super sexy because improves your cash flow, it improves your net profit, and it improves your overall business valuation; things that are critically important to whatever your goals might be. So how do we do that?
Well one of the best ways we can do it is by decreasing our overall costs of goods sold. What are costs of goods sold? Costs of goods sold are the costs of the goods that we sell. It’s the costs of whatever it is that we’re selling to our customers. If we’re a manufacturing firm it might be [this], if we’re a service based firm it might be me, you never know but it’s something that is being sold.
So what we’ve got to think about is how do we decrease costs of goods sold? A lot of the times, I find, and this is true across every industry, we’re pressured into customization. “Hey you know, I love your product but if you just tweak it a little bit, if you just add this little feature, you know if you would just do those 5 things for me that are outside of the other 80 things you’re doing, then I’d really appreciate it.”
In construction, they’re pretty good about this and they call that a change order. For the rest of us, a lot of us are not very good at it, in the service business or in other businesses in manufacturing, and we go ahead and we just, “oh, sure, we’ll add that little thing for you,” but what we forget to charge for it.
One of the key critical weaknesses is our discipline on costs of goods sold. If we understand that adding a product or service is going to increase our costs of goods sold we must also then add that to our price. We cannot lose gross margin for customization. And again, this applies to every business under the sun, we all get asked to do these things and it’s very important that we hold our ground; not in a negative way, but in a very positive way.
If you went to a car dealership and said “hey, what does your base model cost?” and they said, “$40,000,” and you say, “great, I want new wheels, I want the premium stereo system, and by the way I want all the bells and whistles I can possibly get on this car,” and they say, “it still costs $40,000,” you would be pretty amazed. You expect it to cost more, your customers will expect the same thing. You have to have the discipline to ask for it.