Business Problem: Are Your Margins Lower Than Your Competitors’?
Great business models are built upon great margin. What does it say about your business model if your competitors’ margins are better than yours? It’s not the end of the world, but it certainly means you’re climbing at a steeper grade than your competition.
Decreased margin puts you at a significant disadvantage vis-à-vis your competition. Competitors will be able to hire better employees, because they can pay better. They’ll be able to hire a better sales staff, because they can pay better.
They’ll be able to advertise more, because they have more margin enabling them to do so. They’ll be able to subsidize one offering with another with the excess margin. The list goes on and on.
If your margins are lower than your competitors’ margins, you have two options:
Fix it: The best option is to fix the problem. Look to innovation for the answer. New, innovative offerings tend to carry higher margins than old offerings.
Live with it: The second option is to live with it. It’s hard to imagine a company creating a higher margin from a coffee offering than Starbucks. If you were stuck competing with Starbucks, you may not be able to fix the margin issue. However, you’d want to design your business model with the presumption of this handicap.
Oil companies such as Clark have a large number of old gas stations built around World War II. They’re built on lots far too small for today’s massive convenience stores. Because of this handicap, Clark’s business model is denied access to the high-margin upsell items in the convenience store. Clark uses a minimal cost model and no-frills approach with these stations as a result.