Before we dive in, let’s lay down three important points:

Simplification is Key: We’ve stripped down everything about margins to its core principles. This means whether you’re running a large manufacturing plant or a small retail shop, you can apply these principles effectively.

Ask the Right Questions: Instead of wondering how much you already know, focus on what you can learn and implement. Asking questions like “What can I apply?” can lead to valuable insights.

The 72-Hour Rule: Ever heard of it? It’s simple—when you hear something new, act on it within 72 hours. Otherwise, the likelihood of taking action drops significantly. So, let’s beat that rule today!

Now, let’s start by defining margins. Simply put, it’s what you earn after subtracting the costs from the price you charge. But here’s the tricky part: most businesses struggle to measure margins accurately.

Why? Because traditional accounting methods like profit and loss accounts often overlook crucial expenses like loan repayments, taxes, and supplier costs. This makes it challenging to get a clear picture of your true margins.

Now, onto the two components of margins: prices and costs. Many businesses set prices based on their competitors, hoping to cover their costs and make a profit. But this approach often leads to margin squeeze, especially when costs unexpectedly rise.

So, how do you tackle this margin maze? We’ve got a simple yet powerful model to guide you through:

Identify Your Transactions: Think about the different types of customers you deal with—your A-grade customers who bring in the most profit, your average B-grade customers, and the troublesome C and D-grade ones.

Target Your Blue Customers: These are your best customers, the ones who bring in the most profit. By understanding what keeps them loyal—whether it’s quality, service, or price—you can tailor your marketing efforts to attract more of them.

Ditch the Reds, Convert the Oranges: Your least profitable customers, the reds, are dragging down your margins. It’s time to cut ties with them. As for the oranges, there’s potential to turn them into blues with the right approach.

But remember, this isn’t a one-time fix. It’s a gradual process that requires a shift in mindset and continuous effort. So, make a start today, whether it’s analyzing your transactions or reaching out for expert advice.