Do you focus on margins or on turnover?

If you maintain premium pricing, thereby focusing on gross margins, your per-transaction profitability significantly increases BUT your turnover will, in all probability, get impacted. Customers, especially the more price-sensitive ones, will migrate to your competitors, if they perceive you as being higher in price, without any perceivable value difference. On the other hand, if you focus on turnover at the cost of margins, you will stand to gain business, for sure. But, your per transaction margin will be low & this will impact your overall profitability, in spite of you having achieved high turnover. In such circumstances, what should a businessman do? What should he accord priority to – to turnover or to margins?
The correct indicator to focus on, in every circumstance, is neither turnover nor gross margins. It is return on investments. To understand this better, we need to get down to basics. Why does a businessman engage in the pursuit of business? His primary objective is neither market share ( i.e. higher turnover) nor per-transaction profitability. His objective is to ensure that his investments earn adequate returns, i.e. returns far in excess of what he gets if he invests in low-risk options that are available to him. And what is this risk-free return? Well, that varies from country to country & from time to time. A commonly used ballpark figure is 15 %. That is, if a businessman has invested his funds into any business, he must earn a return higher than this risk-free return, which also closely correlates with the hurdle rate. Otherwise, why should he take the risk of investing in a business? So, if a business generates a return higher than this risk-free return, then the objective of taking the risk is justified for this businessman. Else, it is not. And, how does he generate that quantum of return? There are 4 levers that he can use to impact this indicator.

One is, of course, the gross margin generated per transaction. Needless to say, the higher the margin, the higher the return. The second lever is turnover. The higher the turnover for a given fixed cost, the higher the return. This implies that in case the businessman decides to go in for competitive pricing he must ensure that he gains enough market share, ie volume, so that the lesser gross margin per transaction is compensated by the higher volume, thereby ensuring that overall gross margins ( which is the multiplicative product of the number of transactions & the gross margin per transaction) is significantly higher than, what would have been the case, without the price drop.
The third lever is fixed cost. Needless to state the higher the fixed cost ( ie rentals, wages et al), the lower the overall net margins.
The fourth lever is overall investments in the business. A key contributor to this is the investments made in working capital, ie stocks ( both finished goods & work in progress) & collectibles ( ie customer debts). The lower the investments for any given turnover, the higher the return on investments that the businessman makes. So, it is imperative that stock levels are maintained at optimum levels – just enough to ensure that there are no stockouts. Any excess inventory ( especially when this turns into aged stocks) significantly reduces the return on investment of the businessman. Similarly, the higher the collectables for any given turnover, the lower the return made. It is therefore critical to adhere to a judicious credit policy & to avoid the build-up of any customer overdue. Now that the businessman is aware of the 4 levers that he has under his control to optimize his overall return, he must first try and understand which of these 4 levers is off the optimum mark get this back on track. And yes, he must be in a consistent quest to keep on optimizing each lever, bit by bit, thereby slowly but surely enhancing his overall return from investments. It is this composite indicator that determines how successful he has been in his business.