Episode Transcript

Michael Abernathy 0:09
What’s up everybody? Welcome back to THE a.m guys, welcome back to five minute rants. I’m your host, Michael Abernathy. And welcome to show predicated on the journey of life and business. I’ve got Joseph Powell back here with me and we talked about actually doing three episodes, just because some of the stuff he has to share I think is worthwhile. Welcome back, Joseph.

Joseph Powell 0:31
Good to be back. How are you Michael?

Michael Abernathy 0:32
I’m doing good, man. So we talked about for today really talking about gross margin and why it’s important for a company can you dive into that?

Joseph Powell 0:41
Yeah, sure. Gross Margin. Gross Margin is one of my favorite things to talk about customers, talk to customers about behind cashflow. It’s the thing that I think has the biggest impact on their business.

Michael Abernathy 0:54
Why real quick, why?

Joseph Powell 0:55
The outside wait that it has on overall profits. If you can increase gross margin, it has more of a thing than just decreasing general expenses. So back up a bit. What is gross margin? Loosely defined is the percentage of revenue left after direct costs are accounted for. So if you’re a manufacturer, that’s your cost of goods sold. I look at 4 ways that it can be impacted which are the four main drivers of gross margin. That’s price, cost, revenue mix and operational efficiency.

Michael Abernathy 1:37
Okay. Out of those four, Joseph, What do you believe is the most important one to focus on if you can only pick one?

Joseph Powell 1:44
Price.

Michael Abernathy 1:45
Why do you say price?

Joseph Powell 1:47
price is the low hanging fruit. Most most businesses I find don’t charge enough to begin with, most businesses could do with raising prices, anywhere from 10 to 15%. And their customers wouldn’t, wouldn’t blink an eye.

Michael Abernathy 2:06
That’s really interesting.

Joseph Powell 2:08
It is. When I talk with clients, we usually try and come up with a with price increases. And What I tell them is you schedule your price increases, usually that’s annually. But scheduled price increases just don’t shock your customer base like, like the increase in every five years, which is that’s when you lose customers.

Michael Abernathy 2:29
Wow. So it’s not even so much the price increase. It’s the consistency of expectations, that that makes it or break it. That’s really interesting. Okay, all right. So you’ve had you picked number one, pick number two, what’s your second best one?

Joseph Powell 2:48
The opposite side the cost. Because, again, there’s there’s some low hanging fruit, I mean, the obvious, the obvious advice is to ask for a lower price when you’re negotiating with vendors. But beyond there, you know, you can shop it around and look for new suppliers. A big thing you can do is volume discounts, try and buy on volume. And then clean up non value producing cost, which are

Michael Abernathy 3:20
Yeah, I was gonna ask you what’s a non value producing cost.

Joseph Powell 3:24
So those are costs that are a product of delivering your product or service, but don’t add value to the service. So think like shipping and handling or credit card processing fees, or in service businesses, even over time, your employees, I would throw in that in that category.

Michael Abernathy 3:42
I’d agree with that statement. That’s really good. So getting rid of this stuff that actually doesn’t add value to your offering.

Joseph Powell 3:50
Exactly.

Michael Abernathy 3:51
Okay. All right. Number three,

Joseph Powell 3:52
Saving, saving on those costs. Number three’s revenue mix. There, it’s just about trying to find ancillary services that that you can offer, your core product is going to drive the ship, but margins on the extra services that you can add on to that can can really transform your business.

Michael Abernathy 4:17
Fair enough. And What do you mean by revenue mix? Just kind of describe that as well to define it for everybody.

Joseph Powell 4:23
Yeah, so that could be that could be, you know, it could be the the initial implementation and then the ongoing services. That’s two different revenue mix. You have implementation revenue, and then you have service revenue. It could be you’re selling a product, it could be warranty revenue behind that. If you provide a warranty on that is insurance. You know if you still thinking major cell phone manufacturer, they still insurance on top of it. Yeah,

Michael Abernathy 4:59
That make sense. That makes sense, man. Thanks for coming on we’re actually at the five minute mark. You guys gonna have to go do some homework and look about operational efficiencies and how this affects but man, this was super good thank you very much I appreciate you for coming on man.

Joseph Powell 5:18
Yes. Thanks for having me.

Michael Abernathy 5:20
Welcome welcome and we’ll do a third episode to complete the series. Awesome. Catch you later guys. Peace