Making Up Product Losses With Increased Volume
Over my lifetime, I have heard people in various industries say one of the most idiotic statements ever uttered:
We will make up our losses on volume.
Math Doesn't Lie
Ok, let me get this straight. You have a business. It's highly competitive. You decide that you will have to sell your product at a small loss to be in the game. And you think that you will make it up by generating a higher volume for your product.
But it doesn't work that way. If you multiple small losses by big volume, viola ! you have large losses. The math is simple. Lots of small losses equal one big mess and a lot of red ink on your books.
You have to do more than increase volume alone
A lot of naive business people believe is that this crazy formula "works". I have seen it in medicine. In retail. In many different sectors. They don't realize that there is more to it. They think that they will become magically profitable because they are busier. That simply isn't so.
Yes, the volume can help, but you need to know ahead of time how that volume will reduce your supply chain costs. The cost of raw materials. The cost of purchasing your product for resale. The cost of shipping. The cost of fulfillment. You have to know how you will reduce these costs, and know both how much and when it will kick in. Plus you should have those items "locked-in" so you are not trying to negotiate those savings once your volume increases. After the fact simply won't work in most cases.
Ask The Question They Don't Want To Answer...
If you are in a meeting and someone makes a case that you can make up for product losses by increasing your volume, ask the one question that they may not be prepared to answer:
HOW?
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