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Hidden Profits

A CEO Follows the Product, Turning up a Slew of Hidden Profit

March 5, 2023
The product changed hands, and was resold at a higher price each time, six times from factory to end-user.

Everyone learns about the marketing mix in business school. The proverbial four P's. Product, price, place and promotion. Seems fundamental, but few CEOs examine their marketing mix with a critical eye toward how it should be changed. Especially those who have used the same marketing mix for decades.

I once took over a company that had terrific profitability. For years, it used the same marketing mix—and given the company’s profitability, it was successful. No reason to look further. Profit was good, so the marketing mix must be fine, right? Not so fast. Good profit doesn’t necessarily mean that at all.

So I dug in to find out whether changing the marketing mix would reveal hidden profits. My analysis was exhausting and comprehensive. It took the better part of a year to complete. I followed every single product from the time it left my factory until the time it reached the end-user. It started as an academic exercise just to understand how the money flowed. But the deeper I dug, the more the exercise revealed hidden profits. Huge hidden profits.

In my case, from the time a product left the factory until it reached the ultimate end-user, it changed hands as many as six times. And every time the product changed hands, it was resold at a higher price than it did when it left my factory. Imagine the profit all the intermediaries were making. Profit that I felt I should have since I was the original manufacturer.

You do the math. Take my profit and multiply it by six times. That is a huge hidden profit that was not being captured.

Price and Promotion

Up to this point, I had critically examined two of the four P’s: Product and Place. Now came the hard part. Price and Promotion. Just because intermediaries were capturing a large portion of my profits didn’t mean I could wave a magic wand and capture those profits. My pricing to the end-user had to be carefully determined so it was attractive to them.

I knew the end-user would be concerned about switching costs. And since the end-user didn’t really know about my company, promotion became an important, and expensive, undertaking. That was years in the making.

So how did it turn out? I began selling directly to the end-user, raised my prices and therefore profit by a whopping 60%. At the same time, the end-user paid 40% less than prices from the intermediaries. That is what I call a win-win.

Here are 5 things you can do to reveal your hidden profits:

  • Just because your marketing mix is performing well doesn’t mean it couldn’t perform better. Do a deep dive on it every few years to see whether you can uncover hidden profits. Chances are you can.
  • Follow your products everywhere they go in the world. Dig in and find out who touches it, where they touch it, and how much they charge. This will take a lot of work but will be well worth it.
  • Agents, particularly international agents, are notorious for price gouging. And they don’t like you to know how much they are charging. Don’t rely on them for pricing information. Get out there and talk to your customers personally.
  • You can spend an infinite amount on promotion. Don’t. You may need to exhibit at trade shows while you are introducing the company to end-users. Bear in mind that the last middleman before the end-user has credibility, and you don’t, so you will have to establish that. That will take feet on the ground and face time with end-users.
  • Finally, don’t depend on your sales and marketing teams to do the mix analysis. They will probably tell you everything is fine the way it is. Bring in some outside help to do this.

Steven L. Blue is president & CEO of Miller Ingenuity. He has published five books that teach senior leaders and CEOs how to increase profit, take market share and destroy competition and serves as CEO-in-Residence at Winona State University.

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