High Margin/Low Volume vs High Volume/Low Margin

Michael Buffer, Emcee Extraordinaire Introduces The Retail Rumble.

Aesop’s The Tortoise and the Hare of Business Strategy

In this corner weighing in at an imposing, muscular 240 pounds is the heavyweight HM/LV. In the opposing corner weighing in at meagerly bantam weight of 118 pounds is the lightning quick HV/LM. Now keep it clean and no punching below the profit margins.

Today’s business environment offers us rapid technological evolution, an ever-changing retail landscape as well as amorphous customer trends. Some companies have become infamous for their fast sale-cycles and large customer attrition. Back in the day when I was still wet behind the ears, we were taught high consumer attrition equated to weak business models. However, some of these aggressive folks generate positive cash flow. Closing high volume transactions at incredibly low rates; perhaps with supplementary accords like one-time set-up fees, or a term contract, these fishermen cast wide nets.

 

Meanwhile, other firms have opposing philosophies handling smaller quantities of deals resulting in higher revenue. These sniper assassins pay closer attention to customer needs and satisfaction to preserve high margins. Visualize a boutique luxury brand or a software company where a single sale can carry the day. Hermes!

While the latter model may appear the wisest, prudent approach, there are specific instances that have proven this theory incorrect.

The so called big-box-retailers — American mega-stores that sell such high quantity of products they can operate on minuscule margins. While quality and price of goods traded at these retailers are low, the sheer amounts of sales generated are notable. Walmart!

Low-profit margin products and services may be a strategic manner to attract cost-conscious consumers. Seldom do these operators concern themselves with a diminishing customer base. Moreover, targeting a niche market, has its inherent volatility as it is based upon a small customer pool. Niche retailers and service providers must have a highly defined product that resonates with their core clientele. The key with high-profit margin companies lies in the product itself. Birkin Handbag, Ladies!

Every so often the market offers us a hybrid scheme that balances these two approaches. Real estate sales and marketing obviously handles high priced products: homes and apartments. However, to assure a considerable sales volume, real estate agencies create devices whereby they transform these high valued products into commodities. Terms such as: studio apartments, pieds-a-terre, penthouse, price-per-square foot are all descriptions allowing these vendors to market in commodity-like trades.

If you were starting a company today which model will you apply?

Published By Luigi Rosabianca of Shield Advisory Group