Eavesdrop on management meetings of firms around the world and you’re likely to hear a discussion about how to cut costs in order to increase profits. That’s the wrong discussion to be having.
Certainly professional service firms could trim some unnecessary or outmoded operating expenses. Maybe even some people expenses. But it turns out that’s actually not the most effective way of boosting profits.
Here, in order of effectiveness, are the best ways to improve your bottom line:
1. Improve your pricing: A 1% improvement here produces an 11% improvement in profits.
2. Reduce your variable costs: A 1% improvement here produces a 7% improvement in profits.
3. Increase revenues: A 1% improvement here produces a 4% improvement in profits.
4. Reduce fixed costs: A 1% improvement here produces a 3% improvement in profits.
*Study by McKinsey & Company
So, if you improve your pricing by just 1%, you’ll improve your margins by 11%. How do you improve your pricing? First of all, by realizing that pricing is not the same as “costing,” which is what most agencies do now. Pricing should be determined by the perceived value you deliver, not the costs you incur. While cost is a calculation, value is a perception.
Imagine taking all the time you spend laboring over cost cutting and instead invest it in becoming better – and more creative – at pricing. Now image an 11% improvement in your bottom line, because that’s what you’re likely to get.