Saturday, 1 March 2014

CEOs: Revenue or Cost, what is more important to you?


My assumption is, since the time, man has learnt doing business, he has not been able to take a conclusive decision about what is more important to run a business successfully, that too for a longer period of time – revenue or cost. More attempts to seek advice, more one gets confused. Complications have multiplied with the advent of various strategies like Differentiation strategy, cost strategy etc which emphasize different aspect of business to achieve continuous success. Let me say, there is nothing wrong in all these strategies as all aim to increase business propensity. Only thing, Business Heads, primarily CEOs need to decide is what is more important for them – Revenue or Cost to build their businesses. More challenging it may become, if a CEO follows Cost Leadership, whereby decides to check cost of production to increase gross margin or profitability. Important is focus or not to focus on cost reduction but remain thoughtful of ‘blinders’, one put on to other means to increase profitability.

CEOs need to also understand that creating a value for customers and capturing a value for self has a defined pattern. Value for self and for customers, in other words can be created going by a principle well studied and researched.

Studies show that whatever is the strategy, a CEO has to remain stick to very fundamental of increasing revenue continuously to establish a business successfully; cost leadership to my understanding only plays a supporting role in increasing profitability. Lets us dissect the very fundamentals of a business parameters of success. Generally, to ascertain profitability, return on assets is used by companies. Return on Assets (ROA) is calculated as income divided by book value of assets. ROA can also be arrived at by multiplying ROS and TAT. To mention here, mathematically ROS is calculated as income divided by sales and TAT as sales divided by assets. This clearly shows, that common to both ROS & TAT is Sales. Therefore, any change in sales revenue shall impact the profitability. ROA also leads to the interpretation that profitability can be improved either by increasing income or by decreasing cost or assets. It has been reported based on research that ‘exceptional’ companies prefer to increase revenue in a structured & thoughtful manner. Therefore, mostly successful CEOs follow Price-driven Efficiency. It can further be explained as to increase profitability; one has to go for higher unit price or higher unit volume proposition. It thus can be recommended to brooding CEOs, want to make your company successful today & tomorrow, follow Revenue Growth Model i.e. through price rise to generating more revenue.

Now, the question comes how to increase price? Does this revenue growth model apply to all companies & industries? Lets dive together.

It is worth noting that if a company wants to increase price, it should not dilute its focus on either of two parameters – ROS & TAT. Companies which are successful in long run, ensure both good ROS and good TAT. This is achieved, when companies in a structured manner focus on charging premium on their products. This can only be achieved when customers look at a product beyond its providing only ‘Price Value’. It is therefore recommended that companies must go for building their own brand in the eyes of customers; thereby making themselves worth charging premium on their products. Brand building is done by a company making itself & its products been ‘Seen’ regularly in the market. Regular interventions are required by companies for becoming worth charging a premium and to charge premium later, regularly. It is easier said than done?

Other way of increasing profitability or ROA is by keeping assets relatively lower. Companies have to go for brainstorming rather ‘reverse brainstorming’ sessions to find out ways & means to decrease assets value. Sometimes, it has been seen that to keep the cost lower, companies come up with innovative ideas to trade off higher assets. It thus means that a company within its boundary wall has to balance between price value and non-price value. It is advised that even one has to pay more etc, one should do it for increasing first revenue and consequently ROA at the end.

Let me also clear here that increasing profitability through better ROS and TAT is not something new to the world but consistently used by exceptionally successful companies than not-so successful, meaning that this principle is universally applicable to all and every type of companies & industries, even in retail sector. My reason of emphasizing so on retail is that it is said that retail works on the principle of ‘lower prices’ and ‘lower costs’ to achieve superior & continuous profitability.Mostly retail sector like commodity, follows Cost Leadership. Retail industry is said to be infected by a ‘discount disease’. A customer invariably looks for some discount at retail counter. In a lighter way, one even looks for ‘discount on discount’ – very peculiar to this industry only. I hope you did,every time you stand at a general store?

But, you will be surprised to know that even retail companies which are successful and have created a long lasting business for themselves do follow revenue increase model or the price driven efficiency principle. Yes, other fact however linked with this is that companies when go for higher revenue, should also be ready to incur higher cost. The higher cost, one has to incur initially is to establish itself in the market on 'Non-Price Value' based growth. Once, established, a company can look for higher profitability for 'perpetual' basis.

One, has to keep in mind always that unit price premium and revenue driven by unit volume, both leads to exceptional performance. a condition of Economies of Scale.

Sometime on the face, it has been seen that some companies are driving profitability with lower cost along with higher volume and not higher prices. A condition of ‘Volume-driven efficiency’ which is a measure of superior assets turnover (TAT) may seem to follow some other principle but reality is very different. It has been found in research that companies seem to be following superior assets turnover proposition in turn actually found to be following a non-price value proposition i.e. achieving increased revenue through higher volume. This higher volume is achieved through non price value & not by lower prices.


In nutshell every company from a commodity to ‘premium product business, must strive charging ‘Premium’ on its products; achieving higher revenue. It can also be said & recommended based on research that superior profitability can be achieved not by lower cost and higher volume due to lower price but by higher volume coming out of customer demand due to 'non-price value'. One may come under pressure initially as revenue model may lead to higher cost even to the point of a 'cost disadvantage'. Cost efficiency merely supports not builds a business. Yes, one must look for innovative choices to achieve non price value driven revenue growth. In long run, non price value pays back by charging higher prices or generating higher volume. Consequently, one has to go for in a big way for increasing revenue, even at the cost of 'higher cost'.

2 comments:

  1. Sir. I am fully agree with above view. We should focus on our premium products to have better margin as well we should expand to. Expansion is required to cover increasing overhead burden on organisation as well it will cater increasing demand and set new targets for future.

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  2. Thanks. only to add here, every product can be made a premium product.one has to look for ways & means for that

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