High volume low margin or high margin low volume?
In an age of start-up companies, fast-paced technology advancements, and companies testing out business models new to the game, finding the appropriate sales package has become an evolutionary role within an organization.
Some companies have become notorious for their fast sale-cycles and large customer attrition. While customer attrition has been taught to mean weak business models, some companies that follow this model are still making money. How? They are closing a truck load of deals, at incredibly low rates and perhaps with ancillary agreements like a one-time set-up fee, or a 3 month contract, and their customer pool isn’t running out.
Other start-ups make much smaller quantities of deals with higher costs and pay closer attention to customer satisfaction in order to preserve a high margin. Think IBM or other software companies – the software itself is a huge investment as a product, but a single sale is worth the slow sales cycle.
While the latter model seems to be the wisest, safest plan, there are very specific instances that have proven that theory incorrect. For instance: WalMart, the Ameran mega-store that sells such a high quantity of products they can operate on a smaller margin. As a result, WalMart is one of the wealthiest businesses in the world to date. The quality and price of WalMart items are low, but the amounts of sales that pass through this company each day are exponential.
What’s the difference?
Low profit margins are a great way to attract cost-conscious customers because you’re able to offer them a low price, and you aren’t concerned with running through your customer pool. For instance, if you are selling to a local market, in a niche industry, your customer pool is inherently small, and will inevitably run out. Having a product that isn’t worth repeat customers, no matter what the cost, will not be beneficial to you.
Large retailers that sell mass quantities of items, regardless of quality, may take advantage of low profit margins because they are able to offer additional attributes to customers that keep loyalty and membership high. Large retailers also have a larger pool of consumers. In order to sustain a low profit margin you need to have high product turnover.
High profit margin organizations can make fewer sales than a low profit margin organization because the cost of their product is not marked down. The key with high profit margin companies lies in the product itself. Is the customer happy with its performance, or with the exchange you’ve made.
Do you think that determining high margin or low margin depends on the product you sell? If you were to start a company today which model would you implement? What other unorthodox business practice has started to become mainstream?