2 weeks Ago
Some industries are struggling to survive in the face of the prevailing symptom of low demand. The results are evident. There is uncertainty in all sectors, and the word “layoffs” has gone from being an unknown and stigmatised term to something more common.
As demand falls, many companies cut costs or investment budgets, seeing this as the only way out. “It’s the effects of the moment,” analysts say, and managers are eager to agree. The famous profit equation seems to be at the heart of this type of reasoning: VxP–C = B Where V = volume, P = price, C = costs, and B = benefits.
Knowing that V (volume) may be low and that P (price) must fall in difficult times like these (due to low demand and price competition from surviving firms), it is not surprising that the only way out is to contain or reduce C (costs). At a time when the cost of raw materials is rising and there could be inflation, the problem is shifted to the ability to freeze wages, cut personnel, reduce marketing budgets, limit training, and generally attempt to cut costs that do not have a very direct impact on the product. But what if we are wrong in our initial assumptions? What if not all the variables are exogenous and are actually correlated? Price today is closely related to the value you receive, and this can change the way we see the equation.
Starbucks has revolutionised the coffee market, and people have gone from paying triple what they normally would for a coffee in different conditions (more personalised, more specialised, turning it into an experience). A number of Michelin-star chefs have managed to dramatically increase the prices of their menus, and many luxury hotels are able to keep raising nightly rates while still maintaining full bookings. It’s clear that there is polarisation at the extremes — customers are willing to pay more for something different (including the idea of experience) or pay as little as possible for something that isn’t.
Sometimes you even find the same customer buying from Zara or H&M and from Chanel or Loro Piana at the same time. They always look for the best value for the price, understanding that if there is no difference, the smart choice is to pay as little as possible, saving to spend on what is different. The key lies in the value perceived in each case — price is merely the means of accessing that value.
Therefore, the notion that the price of our product or service must go down to sell is not true. The price must be adjusted to the value we offer, and we must be able to convince the customer of this. That is why the C (cost) we incur must pass this scrutiny.
A distinction must be made between Good Costs (those that add value to the product or the customer) and Bad Costs (those that only add expense). Bad costs include excess capacity, unnecessary stock, poor quality costs (warranties, repairs/replacements), inefficiency costs, and costs that add complexity or duplication in processes. There is also another cost line (C) that depends on execution.
Take advertising or training/investment in training as an example: Is it a bad cost or a good cost? The answer is — it depends. Are we really able to identify a direct effect on results? Can we measure the impact of these investments on direct indicators (stock reduction, increased sales, productivity, etc) or indirect indicators that we know are important (customer satisfaction, which later impacts sales and/or the ability to increase prices, employee satisfaction, which then increases productivity and/or reduces turnover costs)? Consequently, the indiscriminate approach of focusing only on reducing C (costs) can cause the company to enter a vicious cycle (low demand—less cost—less value—more price pressure—lower costs). It is in these difficult times that those who truly understand the equation and invest in these elements strategically and with a business vision will thrive.
They will not focus their business on surviving by cutting budgets. They will focus their business on the customer, by investing in the levers of the entire value chain — whether to attract, retain or serve customers better and faster. Dr Philios Andreou Sphika is the Deputy CEO and President of the Other Markets Unit, including Thailand and Asia, at BTS Group, a leading global strategy execution consulting firm specialising in the people side of strategy.
With a wealth of experience in strategic alignment and cultural transformation across various industries, Dr Philios is passionate about helping organisations achieve their full potential. He is deeply committed to working closely with teams and businesses to drive meaningful impact on a global scale. For executives who are interested in connecting, Dr Philios can be reached at philios.
[email protected] or visit his LinkedIn profile Dr Philios Andreou Sphika, Deputy CEO and President, Other Markets Unit, BTS Group.
