Episode #0121 - Margin Management: Why Revenue Growth Isn’t Enough

TIME-STAMPED NOTES:

[00:00] Intro: Why Margin Management Is Harder Than Revenue Growth
[02:22] Why Pricing Strategy Fails Without a Margin Management System
[06:16] When Pricing Strategy Breaks Down: Rebates, Costs, and Margin Protection Risks
[11:44] Margin Management in Action: Building a Strong Pricing and Margin System
[14:39] Conclusion: Margin Protection Requires Discipline, Not Just Growth

 

Running a business is not easy. Growing revenue, making money is really, really difficult. Winning new customers takes a lot of time, often lots of stakeholders involved. Sales cycles are getting longer, competition is heating up. So when companies grow revenue, I know that’s a real achievement, but there’s another challenge that often gets much less attention and that’s margin. Because if revenue is hard to make, margin is even harder to protect. 

Hello and welcome. I’m Joanna Wells, founder of Taylor Wells Advisory, and we focus on improving margin through better pricing strategy. 

Now in this podcast, I just want to share some of my experiences and some practical insights on pricing margin and commercial strategy for CEOs, executive teams, and pricing teams.

And today I want to talk about something very simple, but very important, how revenue is difficult to make, but margin much harder to protect. In Australia, businesses are dealing with ongoing change and disruption. Almost daily wars are affecting energy and commodity markets. Supply chains have been unstable, not just for a year or so, but for several years, and input costs remain unpredictable.

At the same time, many Australian businesses are buying products in the US dollar or Euros. FX changes are, are becoming a real headache for businesses, and that just creates another layer of pressure and complexity. When the Australian dollar weakens those same products suddenly cost much, much more, even if nothing has changed with the supplier.

Costs can still move quickly and often without much warning. And at the same time, what else do we have? Interest rates have just risen the other day. Customers are under pressure. Small businesses, large businesses, you name it, families, consumers, all under pressure and demand in some sectors is becoming less uncertain by the day.

 

Why Pricing Strategy Fails Without a Margin Management System

 

[02:22] So while revenue remains important. Margin here has become far more exposed than ever before, and this is where the pricing and margin system becomes critical. Actually, coming to think of it, there’s something really quite interesting and strange about margin. Most leaders and teams believe they are managing it, but in reality, when you really look at your business.

Are you really managing margin or are you actually only managing parts of it? Sales manage discounts, finance, manage costs, operation managers, fic efficiencies, marketing, focus on growth. Very few businesses actually step back and manage the entire end-to-end pricing and margin system together. And that system is what I call the pricing and margin system.

Now, every business has one. Even if you don’t think you have, you have one. And even if it wasn’t designed deliberately, it’s the set of decisions that determine how much profit your business is going to keep. For example, how prices are set, how discounts are managed, how rebates are used, how costs increase are handled during costs, pass through processes, and which customers the business focuses on and why.

A few years ago I met a business owner. He owned a B2B manufacturing business. Anyway, we were talking and we got onto the subject of pricing, and he strongly believed that his business’s pricing was really strong, that they defined, you know, value, they understood their customer’s perceptions of value, that they knew that they thought their list prices were highly competitive.

Et cetera, et cetera. And anyway, that he was going on to tell me that, um, they regularly introduced price increases and if we could come in and just have a, a look at the, the detail to ensure things were, you know, running as smoothly as, as he thought that would be great. So we did, we took on that invitation, um, and we analyzed their invoices.

And what we found was that the customer’s prices were actually much, much lower than the belief in the business. That, that, that actually, that he had, um, what we had to reveal to him and somewhat awkward discussions was that his sales force. We’re fundamentally creating hundreds, if not thousands, of different pricing arrangements through small negotiations, what we call in the pricing world as price exceptions.

And that essentially discounts we’re building up over time outside of the official. Discount matrix in in the the ERP and that ultimately different customers were on different arrangements. They weren’t on a neat listless arrangement that he thought they were on. And what we have here then is on paper, in in systems, a great pricing and margin system.

Versus what’s in reality is an actual, the main, pricing margin system in the business that the sales team are actually running.

 

When Pricing Strategy Breaks Down: Rebates, Costs, and Margin Protection Risks

Rebates are another part and often a forgotten part of the pricing and margin system. Only are they forgotten or maybe they’re forgotten because of this, but they’re often very poorly understood.

In theory, they’re meant to drive behaviour, growth, loyalty, product mix, and all those great things, but in many businesses, they don’t. Now, as I speak of rebates, I’m thinking of a commodities distributor I used to work with, similar to what you see in the fuel, steel and buildings, material industries. And they had introduced a number of rebates over time.

They had a good intention for using rebates. They wanted to smooth out price cycles. They wanted to reduce customer hoarding behaviours and, hoarding behaviors, especially before price increase. And they wanted fundamentally to create more stable demand. But when we analyse what actually was happening.

We saw something different. Each new rebate. Was introduced, but there was very little tracking of the impact. And instead of smoothing demand, customers actually just adjusted their buying behaviour. Some shifted, uh, product mix change, buying patterns while others worked around. The pricing system. So rather than stabilising the business in this particular instance, what we found was that rebates increased complexity and really did reduce margin.

Now I can see why this happens. In highly volatile markets, there is a pressure to act quickly. There is a fear that if you don’t offer rebates, don’t offer discounts that customers are gonna look at elsewhere. As I was saying before, I know making money is hard, keeping customers is hard, growing the business, not easy.

Often though, there’s almost like a protection aspect of this. We need to protect volume. We need to stabilise demand, and it’s all based on this fundamental feeling of risk and risk mitigation. People being cautious and thinking they’re doing the right thing, but without structure and follow-through.

Pricing decisions take on a whole life of their own. I want to move on to costs now because they are another part of the pricing and margin system now, not because costs determine price. It’s a factor. But it’s not a leading factor. No. But because they create margin, risk and exposure, and I’m seeing this play out right now in nearly all industries with when I see all of this fuel increases and talk about surcharges and what to do with rising commodity costs.

And I want to talk to you about this using an example I have of a client right now who are in the waste management industry. Now, this client is operating in a high CapEx business, large fleet, high field dependency, and very tight margins. With the current instability in the Middle East, fuel prices as we know are moving quickly, going up and up in some cases day by day.

And if those costs are not passed through immediately, this client starts absorbing them. And at the moment we are looking at about a 3% impact if conditions stay as they are today. But no one knows. We don’t have our crystal ball. If fuel moves sharply, upwards, let’s say five or six times, what we see today and within a short time period, the conversation shifts from margin to profit, downgrade to survival.

But here is the real problem, not just for this client, for most businesses. Most B2B businesses still adjust pricing annually or maybe twice a year while their costs are moving monthly. Just giving you that example, maybe even weekly and in some cases daily. So there’s a gap here. Costs are moving quickly, prices are moving slowly, and when that gap exists or exists and is ignored.

What happens to margin, they disappear. And this is where the business needs a pricing and margin system. Costs like fuel need to be built into pricing. Now this could be as a surcharge, as a visible line item with clear rules. And here, when I say clear, I’m thinking clear communication to customers.

Because if your costs move daily, your pricing, your rules, and your communication can’t move quarterly.

 

Margin Management in Action: Building a Strong Pricing and Margin System

So if I was talking to you, person to person in a room today, and I asked you, do you really understand your business’s pricing, a margin system? Which decisions are actually determining how much profit you keep?

Is it pricing, discounting, rebates, cost exposure, customer mix? And are those decisions being managed deliberately? Do you have an owner who are they, is a reset process? Are those rules in the system? Are people following the rules, et cetera, et cetera, et cetera? Because in many organizations, they are not.

Different teams are managing different parts of their pricing and margin system. Sales, negotiate discounts, finance manage costs, operation looks at operation or operational efficiency. But is anyone managing the whole system? Because margin, it doesn’t just fall down all at once. Or maybe it does. When you, beyond the business announces a profit downgrade.

What tends to happen is that it is gradually eroding over time, slowly through small decisions across the business. The companies that I see doing well, performing well with a good balance sheet are doing something quite different from the rest. They’ve built a deliberate value culture, a culture where people understand how pricing decisions affect profitability and where pricing and  margin are managed deliberately with skill clear ownership across the organisation.

So what should leaders do? Just start simple. First, map your pricing and margin system. Understand how pricing, discounting, rebates, and costs are actually working today. Then identify where margin is leaking. Is it discounts, rebates, cost exposure, your pass-through process? Is it the makeup of your customer, your customer mix?

Then thirdly, put clear rules in place. How are pricing decisions made? What costs are passed through and why can you fully recover margin on all costs? How quickly can you make these changes in the system? Have you got the people to do it? And on that point, are your teams aligned? Because pricing and margin is not a sales issue.

It’s not a finance issue, it’s a whole of business operation. It’s a discipline.

 

Conclusion: Margin Protection Management Requires Discipline, Not Just Growth

Margin improves when everyone is working to the same system, so revenue growth matters a lot. It’s extremely important, and profit comes from the system behind the numbers. I mean here it’s the pricing rules, the commercial discipline and the choices that you make about the people you choose to do business with and the products you bring on and your product portfolio.

And in other words, I suppose it’s down to the fact that yes, revenue. It’s very difficult to make, but don’t forget that margin is even harder to protect and to keep it, to protect it properly requires a deliberate discipline. 

Anyway. Thank you for listening. I’m Joanna Wells, founder of Taylor Wells Advisory, and we help businesses improve margin through better pricing strategy. Now if you think this episode was useful, feel free to share it with your teams, and I’ll see you in the next episode. Goodbye.