Leveraging profitability in low‐margin markets

Abstract

Purpose

The article seeks to assist managers in low‐margin markets to grow profitability by applying principles of profit leverage.

Design/methodology/approach

The paper identifies a series of principles for targeting market segments and growing profits.

Findings

Gross margins are usually taken for granted by managers, but are actually key indicators of the types of marketing strategies – what the author calls “gross profit strategies” – that managers should use to leverage the growth of gross profit. Two general classes of gross profit strategies are identified – volume‐driven, and price/bundling gross profit strategies. The latter is particularly applicable to managers in low‐margin markets. The paper also discusses four subsidiary gross profit strategies and illustrates with examples of real‐world firms and situations.

Originality/value

The paper defines market‐driven costing and stresses the importance of measuring “true” gross margins, by measuring costs based on the cost to serve the customer, including opportunity costs. Finally, the paper explicates the relationship between true gross margins and managers' perceptions of their competitive ability to compete in the marketplace.

Citation

Smith, G.E. (2006), "Leveraging profitability in low‐margin markets", Journal of Product & Brand Management, Vol. 15 No. 6, pp. 358-366. https://doi.org/10.1108/10610420610703685