It s part of a cost effective strategy to keep generic products with little differentiation (like smoothies) cheap and cheerful!
At s all to do with 2 major factors1. Cash Flow2. ProfitabilityOverheads, such as light, head, power, Business Rates, Rents are the costs which to a certain level are fixed regardless to how much sales you make, with a few exceptions like commissions.By down sizing Rents can be cheaper and by shopping around for the expenses of the business you can reduce the costs associated with the running of it.Sales less cost of sales (materials) less overheads, less expenses= Profit
The lower your overheads are then the higher the profit margin will be.There is a limit to how much you can charge for a smoothie - you cannot simply increase the cost in order to make the profit margin higher. So you have to look at cutting your overheads: staff/labour costs, marketing, premises, heating lighting, advertising, etc.Bring down the overheads and the profit goes up.
The significance is that by reducing costs the company maintains better cash flow which reduces the need for borrowing and enables products to be priced more competatively. In a failing business the same strategy will help keep it going a little longer
There s a saying: Turnover is vanity, profit is sanity.Build a business model with a strong operating margin. It will help cash flow and enable you to cope with future changes in the competition and downturns in business.
(1) Maximise margin (2) To ensure adequate cash flow(3) Avoid short and long term debt(4) Ensure organisation focuses on core business(5) Maintain key financial indicators within accepted range(6) Provide confidence to financial investors
