High Margin vs. High Volume. Which is Right for Your Small Business?

Deciding your business model is one of the first elements a small business owner must focus on. And the consequences could not be bigger since doing so will determine your brand, human resources, and pricing strategies. So let’s look at how a small business is to decide which type of business model is right for them.

Products vs. Services

Sometimes people oversimplify this decision by thinking that you sell products on volume and services on margin. But that’s not even close to being true. A good plumber may have a high volume of work, thanks to referrals and smart location-based marketing strategies. Yet she may also be able to charge a premium for her services because no other plumber has her level of expertise and everyone in town wants her.  

The point illustrates that what you sell won’t dictate your business model. There are many other factors to consider when deciding which will make you more successful.

The Supply

One of the key impacts into your business model is going to be your cost structure. How much does it cost to produce a finished product or service? How much influence do you have over these costs? While cost alone won’t determine your business model, it is a key variable to keeping you profitable.

The Demand

Another key variable is the demand for your product or service. Are customers familiar with your type of solution, or is it so new you will need to convince them your mythology works, not just your solution? How easy is it to deliver your solution to your customers? What is your total addressable market? Understanding your customers, how easy it is for them to buy from you and how often will help determine volume vs. margin.

The Competition

Studying your competition may reveal new opportunities to serve the same customer differently. For example, one retailer competing on low prices and high volume may leave some customers to seek out better service or more customized solutions which often indicate higher margin. Looking at the competitive landscape may reveal new inspiration for your own business.

Like most decisions small business owners face, the answer about which type of business model to pursue is, “it depends”. But by looking at your cost structure, market demand, and competition, you should feel reasonably good about making a decision.

By Andrew Patricio

April 16, 2018