What are the best strategies to lower your fixed costs and increase your contribution margin?

It's easy to play fast-and-loose with your finances when times are good. But when we're in a period of economic uncertainty or slowdown, tensions are high... and a bad foundation can crumble. While businesses can have primary goals that differ from revenue —?like Facebook in the early days with their user count —?your revenue is ultimately your oxygen. You can't chase goals if you can't breathe.

Totally agree ,, I try and work on 3 scenarios always regardless keep it simple . Plan A =Best case = chase those goals Plan B = trouble on the horizon = strengthen the key revenue foundations = keep the goal In mind Plan c = Poop time = consolidate , reduce costs = park your goals , compound your gains

To lower fixed costs and increase contribution margin, businesses can implement strategies such as renegotiating contracts, automating processes, outsourcing non-core activities, optimizing inventory management, utilizing technology, and reducing facility costs. By identifying areas of inefficiency and waste and implementing these strategies, businesses can achieve greater profitability and long-term success.

Though it is extremely important to keep a positive and optimistic approach when planning ahead, it is equally crucial to prepare for unexpected events that could negatively impact your business. Keeping a reserve fund and calculating extra expenses for potential setbacks can help you weather financial storms. This approach is especially important in the current economic climate, which is characterized by high inflation rates and unexpected taxation. By planning for a rainy day, you can help ensure that your business is sustainable in the long term.

There are usually no easy ways to truly drive down fixed costs. The reality is that for most companies the biggest fixed cost is payroll. Marketing can also be a huge cost driver. Cutting these costs is not easy and comes with tradeoffs, but sometimes it may be the necessary option and in the end could be a silver lining and a game changer for the business.

One way to drive down fixed costs is to review your vendor’s current offerings. If you’ve been a customer for a while the services you are paying for may be eligible for a loyalty discount. For example, yesterday I contacted a vendor about an advertisement I saw offering new customers a better price monthly than I am currently paying for the same service. I was immediately offered a loyalty discount for the next year and will be saving around 20% on my monthly fixed costs over the next year.

Fixed costs can be lowered by; leveraging technology through digital transformation, evolving business structure through business model innovation and optimizing business operations. 1. Digital transformation can be explored through technologies like automation, AI, ML and the IoT, to increase the efficiency of production. 2. Business model innovation can be done in many ways depending on your type of business model, industry, etc. Some measures include; creating a leaner workforce, fortifying the moat of your technology, improving resource mobilization, etc. 3. Optimizing business operations. This is done mainly by leveraging real time data on business people, policies, procedures and practices.

This is often where R&D and investments should come play a role. We often think of internal innovation to be more external focused (develop new features and capabilities) but companies also need to invest in or license new technologies that can widen their contribution margin. Either by improving the efficiency of using inputs (reducing waste) or by increasing the yield from the same inputs. This applies to both product and services companies. In services, for example, if selling more requires you to hire more contractors, then you could be investing into software that improves their productivity.

I want to start by simply sharing what I understand a contribution margin is. It is used to measure the total variable costs of a product minus the sale price of the product. It works best in comparing how a number of products contribute to a company’s margins. Based on the contribution margin formula, there are two ways for a company to increase its contribution margins; you can either find ways to increase revenues, or you can reduce your variable costs. You can smartly increase revenue by improving unit sales through demand chain optimization or by reducing variable costs through supply chain optimization. This article by investopedia does a great job on the topic https://www.investopedia.com/terms/c/contributionmargin.asp

Since I'm pretty early to replying to this request, what I'll offer as my observation based on years and years of managing scores and scores of people in settings ranging from start-ups to multi-nationals is simply this: keep your channels of communication open up and down the organizational chart. That is, create a "suggestion box" seeking input on these precise issues, and really, really read and reflect on each and every one. No one, but no one, knows your business better than your staff doing the real work. Ask them, over and over and over again, how to reduce costs, improve margins, or be more customer-centric, and listen, listen, listen.

One thing I’ve always been taught to remember is that ‘cash is king.’ Keeping enough cash on hand to weather periods of high fixed costs with low revenues (lumpy & cyclical projects businesses are a great example) can make or break your business in off years.