How to Use Your Economic Model to Increase Profitability and Cut-down on Costs
By analyzing your economic model you can determine the drivers impacting your performance and then move to improving productivity.
In a recent article, I discussed the importance of an economic model and how a business can go about formulating its own. As a reminder, an economic model is a tool a company can use to compare its performance with its targets and to identify the drivers behind its results. It is especially helpful in singling out particular variables to get a sense of how they affect overall performance. That article also identified the components that make up an economic model and provided some of the benchmarks by which a company can judge its performance.
Now let’s look at what you should do if you discover gaps between your performance and your targets. To fully comprehend the reasons behind any shortfalls, you’ll need to understand the effects of each individual driver. In other words, you’ll need to “peel the onion” to get a sense of the underlying factors behind the data. Once you’ve identified them, you can isolate and toy with individual variables to see how each impact performance.
Revenue generation is a top priority for any company, and attracting and retaining customer business should be at the forefront of improving your economic model. Here are a few initiatives you can consider:
- Whenever possible, try to upsell or cross-sell your services or subscriptions, while at the same time upgrading the services you offer.
- Analyze pricing to determine whether it is in line with market trends and your company’s input.
- Since customer satisfaction corresponds with retention, take the time to analyze your renewal process. Is it easy enough? Are renewal rates as high as they can be without negatively impacting business?
- Analyze customer support inquiries to get a sense of what sorts of complaints come up, and to ensure they are being resolved as quickly as possible. Keeping customers happy, while at the same time maximizing revenues, is the first step toward closing the gap between your benchmarks and actual results.
The next step is a thorough analysis of your company’s profits. Take a close look at the gross margins for each of your products or services across geographic locations. Consider investing more in the areas with the highest gross margins and exiting areas you determine to be unprofitable.
Even with high revenue generation, a company has to remain as lean and efficient as possible to compete. The good news is there are many ways to achieve this outcome without reducing the quality of services. For example, customer service initiatives can include improving online product support (training videos, user manuals, and customer forums), upgrading the quality of service representatives while reducing their number, and relocating to less expensive locations. Another area in which costs can be controlled is professional services. An accurate assessment of any contracted work up-front as well as a close monitoring of time spent, fees incurred, and the reduction of overhead costs will translate into a sleeker model.
A further way to increase profitability is to develop high-impact marketing tools, ideally at the lowest possible cost. Online resources, such as a company blog, can help to increase visibility and credibility without breaking the bank. A comprehensive analysis of your overall marketing efforts and their corresponding results will help you determine the areas in which increases or cuts are necessary.
Lastly, product development is often a cost-intensive area in which potential streamlining options abound. Here are three ways to cut down on expenses:
- Eliminate investments in features customers do not find valuable.
- Focus on testing and quality assurance processes, as their effective use early on means less need for tweaking at a later stage.
- Replace software tools used in development with cheaper options, and consider shifting the actual development process to a lower-cost location.
These ideas will help to narrow that ugly gap in your company’s economic model, but they are only a starting point. By taking the time to collect enough data to analyze each component of your economic model, you can determine the drivers and get to work on your own improvement plans.
Companyon Ventures enhanced our Expansion SaaS Benchmarks Data Explorer by building the accompanying SaaS Benchmarks Modeling Tool to measure the current and projected performance of their portfolio against other high-performing SaaS startups. Check out the tool here.
Our 2019 Expansion SaaS Benchmarks Data Explorer allows you to find your exact peer benchmarks around the metrics that matter most: YoY growth, gross margin, cash burn rate, CAC payback, net dollar retention and logo retention. Check it out!