What about SMEs servicing the low-end market?
Question: In your last three or four Marketing Rx columns on business growth, you dealt with the high-end market sought after by car dealers, pharmaceutical companies and brokers of three-bedroom condominium units.
Even your column on business growth for advertising agencies dealt with how to go after large, big (and therefore high-end) advertiser accounts.
What about us SMEs who are in the low-end, economy market segments, especially those of us who are start-up small entrepreneurs? And what about our friends from non-government organizations who call themselves “social entrepreneurs” helping the marginalized sectors of our society?
We also want to grow our small business and sustain it. Please share with us your experience in helping SMEs.
Answer: We’re sorry if we somehow gave the impression that business growth is only for those in the “high-end” market segments.
Business growth is everywhere; you can find it in the high-end segments, middle segments and low-end market segments.
Thank you for writing and asking about business growth at the opposite end of the market continuum, or the “low-end” market.
If you have been following the micro-enterprise and micro-finance movements that swept the country over the past decade, you can’t help but be impressed by their many, many stories of business growth.
Visit the websites, see for yourself and read the annual reports of Joey Concepcion’s Go-Negosyo, Tony Meloto’s Gawad Kalinga social enterprises, Mark Ruiz’s Hapinoy Stores, Ruth Callanta’s CCT micro-borrowing micro-enterprises, and many others, and you can’t help but be moved to tears of joy and pride by what you will read.
We’re not saying that reading those success stories will answer your question of how you as a start-up small entrepreneur and your NGO friends as micro social entrepreneurs “can also grow your business and sustain that growth.”
There’s a need to closely and carefully analyze the available data to get the answer you’re after.
For the needed analysis, direct first your attention to the COG [Cost of Goods] item of the Income Statement of start-up small businesses and micro-enterprises who have done well, especially those who have done very well.
What you will notice is how much lower their COG is versus the average in their “industry.”
Understanding what’s behind this lower COG will give you the key to answering your question.
We all know that COG is the largest expense item in your I/S [Income Statement]. This is particularly true for those of you who are small and micro-enterprises, where it’s usual to see an 85 percent or even 95 percent COG.
That means your Gross Profit (or revenue minus COG) is in the low 5-15 percent.
That kind of Gross Profit margin leaves you with very little to adequately cover your marketing and selling costs.
Now take a look at the buying needs of your low-end segment. Potential consumers in this market are very sensitive to price. They will usually go for the cheapest in the market.
And that is a problem for start-up small businesses and micro-enterprises.
To grow your business, you have to grow your revenue. To grow your revenue, you can raise prices but you really can’t because that’s going against your low-end market segment priority value, which is low prices. Or, you can get more consumers to buy more often but they won’t because you can’t lower your price.
So where else can you turn to for business growth?
Why not turn to COG and do something to lower it?
As we’ve already noted, if you look at the COG of start-up small businesses and micro-enterprises who have done well and very well, you will not fail to notice how much lower their COG is versus the average in their “industry.”
It should be obvious to you that if you’re able to lower your COG, you can pass on to your consumers that lower COG in the form of lower prices.
So how can you lower your COG?
One proven way is to get cheaper sources of raw materials, supplies and/or goods.
This was the key to the success of Ben Liuson’s Generics Pharmacy.
According to industry sources, Ben searched and found in India a really cheap but BFAD-approved source of generic drugs.
This allowed Generics Pharmacy to sell its generic drugs at 10-20 percent below the prices of branded medicine.
In contrast, competing generic drugs were retailing at double or even more than double Generics Pharmacy’s retail pricing.
So there’s your answer.
You can grow your business in the low-end market by lowering your costs, which will help you lower your prices to suit the needs of your consumers in the low-end market.
(Keep your questions coming. Send them to us at [email protected] or [email protected].)
