Gross margin shrinking is a warning sign that your business is likely in trouble. Many leaders blame the economy, competition, input cost and/or shifts in the market. They do this, often unintentionally, as a way to shift the focus to external factors. This is equivalent to “the dog ate my homework”.
The real cause of a shrinking gross margin is that your company’s offers are now in the “me too” category:
– Me too
Contrary to common wisdom, finding yourself in the “me too” category is often caused by putting all of your efforts into acting on what your customers tell you they want. This will have you bouncing back and forth between the “me too” and the “better” zones keeping you stuck in the land of shrinking margins.
To expand both your top line and your gross margin, you need to get to the “innovative” or “breakthrough” zones. An innovative or a breakthrough product has these characteristics:
– Fills a previously unrecognized market need creating a significant market pull to your company
– Is first to market giving you a significant pricing power
– Establishes your company as a leader in the space with the numerous associated benefits
In order to escape the me-too zone, your company should invest an appropriate amount of time and energy understanding and addressing the real tough challenges of your industry. You should anticipate future needs and offer solutions your customers need and are willing to pay for (vs. just addressing their wants). Check out our podcasts to gain more insight into how.
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