Monday, January 28, 2008

The Margin. Part I.

During the holiday season I spoke to a number of leaders at ZMO about making decisions on the margin. By that I mean: when we're faced with a choice of whether to take and fulfill one more order, how do we value the decision? In other words, how much does it cost to say "No"?

Margin decisions are particularly poignant at the holiday. That's the time of year where customer demand almost always exceeds our capacity. They want more than we can give. For example, we might have orders coming in so fast we could take 8,000 for the Wednesday before Christmas. Yet we can only ship 6,500. But what if we could ship 6,501? How much does it cost to say "No"? Or, put positively, how much would we gain by shipping one more order?

Even though margin decisions are at their most poignant at the holiday, they exist all year round. And they're always important when we're chasing revenue--like now. More about that in a later post. First, let me answer what is our "margin" anyway?

Margin is the money we have left after we pay all variable expenses required to get a box out the door. Variable expenses like what? Food, for one. And direct labor. And then other sniggly things you might not think of. For example, since almost everyone orders with a credit card and the card companies charge us to accept them, credit card fees are a variable cost of doing business for us. Each new order means we need to pay the card company.

Which costs aren't variable at ZMO? Lots of things. Me, for one. Salaried people are not variable costs, we pay them whether we take the next order or not. And rent. And utilities. And so on.

It's useful to bring up an old economics adage at this point. In the long term all costs are variable. When we're thinking about the margin we're not thinking long term. We're only thinking about the next order. What are the costs we pay to take that one order?

Next time. What exactly are our variable costs? What is our margin?

The closest guess to our margin--in dollars or percent--from a non-marketing person wins a Next Door latte on me.

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