OK, sales are down and your costs aren’t any lower. So, do you go for slash ‘n’ burn to cut costs and hope you can get new resources when sales move up? Or cut prices to the bone in the hope of increasing sales? Or do you use value engineering? Let’s see if I can sell you on the last one:
SLASH ‘N’ BURN
It has the virtue of being easy to understand, but it takes no account at all of why you have any customers. If you sell widgets and have no competitors for widgets, then your customers will buy from you at any price if they need widgets. Once you have competition, then they’ll still buy your widgets if they think they’re the best widgets for their purposes. If you don’t have the best widgets, or you charge more than your competitors for what appear to be the same widgets, you lose custom. It’s a
no-brainer really. Cost problems generally are rooted in sales sooner than cost, leaving this the right approach only when your costs are higher for no apparent benefit. This happens.
CUT PRICES TO THE BONE
If you make just enough to survive, it is inevitable you’ll fold eventually. Technology will advance, making production cheaper for those with enough profit to invest in
that technology. You won’t have that if you’re only covering your costs. Worse still, if you get a lot of sales, you may find you’re overtrading, ie you’re selling more than you can make. While your customers wait for their widgets, you can bet your life your competitors will either give them a sweeter price or a better widget, so you’ll lose them for all time. In any case, do you really want to be the lowest-price provider of widgets? Is that likely to inspire anyone good to come and work for you? Is price all your customers want? Sometimes it is.
As Warren Buffett once said “price is what you pay, value is what you get”. All customers want is for your widget (which can be a product or a service, it doesn’t matter) to meet what they want most effectively. Value engineering describes value as benefit to the customer versus how much it takes for them to get it. If you can think of a way to make your widget hot fashion, reach them quicker, save their lives, etc, you increase value. If you can make them cheaper and just as good, you increase value. If you make them cheaper and not as good, you decrease value and sign your own death certificate.
There is any number of ways to increase value – what are you going to do?