During periods of great crisis, when markets fall dramatically, many companies react instantly and fast by cutting costs.  They do this in order to protect at least their bottom line as much as possible.  This may be a rational response and it may be efficient too, but how effective is it, especially if plans and actions are limited to that only?

What I support in this text here is that before a company decides to cut costs, it will have to do a detailed exercise regarding the potential opportunities it may have in relation to top line/revenue growth (both, in terms of volume and value) and gross profit protection.

When they do so, then they will be more likely to be effective in addition to being efficient and then making the right strategic choices in relation to the long – term course of business.

This is a wholistic approach and it is particularly useful and necessary in periods of falling/stagnant markets and intensified competition.

Here below I describe the key areas to touch.

 

• Pricing

Premium and Value for Money, not meaning the cheap but the one that is well worth its money, will gain ground.  At the same time, consumers’ income will be squeezed.

What companies need to do is first, redefine the price positioning of their products in an objective way and in accordance with the new market conditions.  Second, they need to run some price elasticity studies, in order to measure the response of consumers at different price levels.  In this way, they will be able to make the right decisions in terms of pricing.  To put it simply, they have to ensure that for every dollar they invest in their customers, they get correspondingly profitable sales.

 

• Trading Terms

Discounts of all kinds, contractual and non-contractual, are usually one of the biggest expenses of a business.

In times of crisis, due to the pressure in sales, there is sometimes a tendency to loosen the management of this very critical line.  This is a result of the pressure that salesforce has in order to sell-in or sell-out more and thus grow somehow the top-line.  What I say here is not necessarily that in times of crisis companies must reduce the discounts.  What I say is that especially in such situations, companies have to revisit their discounts and ensure that they handle them as an Investment and not just as an Expense or merely as a Cost Of Doing Business.

To make this happen, they have to revisit the Terms and probably to rethink and reset their approach.  Ideally, they should end up in a model with the following characteristics in trading terms:

1. 1. Clarity in definitions.
   2. Simple (understandable).
   3. Easy to Execute.
   4. Balanced (between customers and across channels).
   5. Transparency (Contractual and non-Contractual).
   6. Effectiveness and Efficiency.
   7. Maximum Conditionality.
   8. Return On Investment

Have in mind that this is a thorough Sales – Finance exercise.

 

• Mix of Sales

What is the mix of sales in terms of brands, channels and customers? This is important to revisit and rethink.  Ideally, the business has to defend its Cash Cows, invest in rising Stars, take some reasonable risks with a few Question Marks and disinvest from Dogs.

I am sure that when you do this exercise, you will find opportunities even in the deepest crisis.

When you do this and identify all positive combinations, the next step will be to reallocate investment across brands, channels and customers.

 

• Promotion Evaluation

Promotions is another area where businesses have to turn their attention during difficult times.  This is because during consumption pressure, promotions are an “obvious” driver in order to improve the top line.  Yes, but …
a. At what intensity?

b. With what objectives and goals?

b. What exactly will be the revised mix of A&P?

d. And most importantly, and that is what I would like to emphasise, how does the business evaluate promotions effectiveness and efficiency (ROI)?

In relation to the latter, we know that there are various models of promotions evaluation.  I would recommend two simple things:

1. 1. Make promotions evaluation an integral part of trade marketing grid.  It should always be done.
   2. Keep it Simple.  Because this is a very difficult task.  There will always be the risk of not having all the necessary data, or the risk of becoming very analytical and building unnecessary complexity.  Keep it simple, you just need to draw some basic conclusions and measure ROI.  The simpler the process, the more efficient it will be.

 

• Distribution/Assortment

The development of distribution is one of the most effective ways to grow the top line.  And this is because it is simple, straightforward and direct.

In this case, the job to be done has as follows:

a. Measure the gap of distribution per brand, channel and customer.

b. Benchmark this gap vs major competitors.

c.  Set specific distribution objectives.

d.  Develop a plan, including specific incentives (customers/salesforce) that will help to boost distribution.

e.  Execute, measure, evaluate and reward.

Under this topic, businesses may review and include new product launches, i.e. the expansion of their assortment with new high growth/high profit SKUs across channels and customers.  NPLs can be seen as a new blood that can positively affect sales and profits.  The key here is to be highly focused and selective (few new SKUs of high impact) and have a cohesive plan of development, supporting both the sell-in and the sell-out.

 

• Credit Risk Management

In periods of severe recession, the lack of liquidity increases significantly the credit risk.

The problem with credit risk is that in case it happens, it has a full and direct impact on profit.  This is why it is one of the most painful effects and as a result we should always have it (especially during recession) as a key priority and top of mind.

In this area, there are three things that highly affect the final result:

1. 1. The very good knowledge of the market and customers.
   2. The very good routine coordination between Sales, Credit Control and Finance.
   3. The speed of reaction in case of negative developments.

 

As I close, I would like to emphasise two ideas, over and above the above.

• Stay loyal to Customers

It is during these hard periods that customers need to feel you close to them and by their side.  This doesn’t mean that you will do what customers want.  But it means that you have to listen to their needs, you understand them and you take them into account when making decisions.

Your customers want to see you, that you stay calm, disciplined, consistent and trustful and that you show empathy as you manage the situation.

• Take care and focus on Commercial Agility

To be commercially agile, you need to ensure that in these difficult times your salesforce remains sharp, speedy and with high morale.  So, take care of your salesforce.

 

• What other ideas or thoughts can you add? Please leave a reply.
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