The key findings this quarter are:
- Confidence is now positive, although only by a small measure, helped by a clear election result.
- Sales growth is still slowing, but at a slower rate than previous periods.
- The Construction industry has shown a marked increase in confidence for this quarter going forward.
- Companies predict a rise in profits growth to around 4.0%.
What does this mean for the UK’s SME businesses?
I will repeat my own view from my last blog (controversial as it may be)! For the vast majority of SME’s, Brexit will have little effect overall on their business. Unless a notable proportion of their business activities relates directly to trade with the EU. This seems to be supported now by the increase in overall business confidence.
Financial performance generally for UK plc is still flat, but that is only to be expected after a significant period (over a decade) of “austerity” and uncertainty over Brexit. However, forecasts for 2020 show this improving and reaching 4.1% towards the end of the year (Q1 2019 3.2%).
Let’s look at two of the key findings in a little more detail for you:
Business confidence is now positive, although only by a small measure, helped by a clear election result.
In the first quarter of 2020 the Business Confidence Index is up significantly on Q4 2019 (-20.6%), at +1.3%. The improvement in confidence is the largest quarterly movement in the index since Q3 2009. That was when when the UK exited the last recession.
This pickup in sentiment is likely to be largely attributable to political factors. My last blog commented that the impacts on business confidence are generally caused by Social, Technological, Economic and Political (STEP) trends.
Clearly, the election in January 2020 itself resulted in the largest majority for a government since 2001. It gave us the clearest path towards Brexit since the referendum. We are now (pretty) certain of the UK’s exit from the EU at the end of transition period in December 2020.
Construction companies also have a high degree of confidence going forward this quarter, up to almost 15%.
But how confident are you with your own business activities? Carrying out a STEP analysis on your business can often show hidden positives as well as the more obvious negatives. When was the last time you carried out an overall health check on your business and looked at its performance, levels of sales or how its people are contributing towards the business goals?
Companies predict a rise in profits growth to around 4.0%
The gap between input price inflation and selling price inflation still remains appreciable.
Selling prices are rising at a slightly slower rate than in recent quarters and this trend is apparent across companies of varying size, and across nearly all sectors. One reason may be that, with demand weak, companies are discounting their prices in order to achieve volume growth. Clearly though, continued discounting cannot be a long-term strategy.
Looking ahead, companies still predict an acceleration in profits growth to 4.0%, thanks to an expected rise in sales growth and a narrowing of the gap in input and selling price inflation. However, a word of caution: many companies often have higher expectations for profits than they end up achieving.
Are you finding that in order to sell your products/services you need to discount your prices?
This is something that a lot of businesses end up doing because it they think it’s the “easiest” way to secure sales. “Securing sales” is not the same as profit generation!
Maintaining sales volume, i.e. the number of units they sell, or the number of clients they gain is great, but you reduce the value of those sales by discounting the price. A 15% reduction of sales price means that sales volumes must increase by over 11% just to secure the same margin – a significant ask in a tough marketplace. We’ve also seen the result of long-term discounting through the effect of “sales” on the high-street names in recent years.
It is my experience over the years that discounting as an everyday strategy is the start of a slippery slope which often leads to financial difficulties.
Reasons for selling stock
Why do you end up discounting your sale price? Generally, there are three reasons:
- You want to sell stock that is getting old or is no longer wanted (e.g. fashion items). Discounting to attract a price-conscious customer who would otherwise not buy from you is a good way to recover the funds currently tied up in that stock; or
- You start a new service or product with an existing client/customer base, or want to develop a new client/customer base. Discounting again attracts a client/customer who would try the “new” product/service at a reduced rate to test it;
- Your value proposition (i.e. what you are selling) does not match the client/customer’s problems. It is intended to solve closely enough. They do not equate the selling price with an equal value to them.
Reasons 1 and 2 are tried and tested processes that work. BUT, they will NOT work in a seller’s favour over the long-term as the level of discounting often results in very low or even negative profit margins for the period of discounting.
Reason 3 arises simply because you have not aligned your product/service as a solution with the client/customer’s actual problems. In which case, the client/customer simply does not recognise your product/service as being sufficiently applicable or attractive to them to pay your selling price.
Do you have a strategy for addressing the problems you may be facing?
The content of this quarter’s Confidence Monitor is encouraging!
But if you don’t have the proper Value Proposition to meet the actual needs of your clients/customers as they perceive it, you will not achieve the sales volumes at the margin/selling price you are aiming for.
One of the many services we provide as part of a Strategy Review is a thorough examination of your products/services. This ensures that you are aiming them at your best target markets. It’s often a neglected area for SME’s who generally sell what they perceive the client/customer wants rather than what their target market actually wants.
As a Business Doctor, I don’t coach; I actually get on to the pitch with you. Our hands-on, pragmatic approach is designed to maximise results, find and exploit your competitive edge and ensure you stand out from the crowd. In supporting you, Business Doctors make a difference by sharing and applying the lessons we’ve learnt in the business world. Driven by our passion for business, we help you gain confidence and then fast track your growth.