Achieving competitiveness through the restructuring of costs
Our client on this assignment was a leading, pioneering, internet service provider (ISP) in the value of money segment, who found themselves under increasing pressure from competition as internet penetration increased, and the price of connectivity devices declined.
A value for money strategy is always an attractive alternative for businesses aiming to carve a niche market built on volume sales. A major challenge for value-for-money strategies, however, is the potentially compromising relationship between sales revenue, quality and growth. While the value-for-money customers expect to pay less than the average market price, they also expect good quality. If the business does not define "quality" correctly in its chosen segments, it easily loses customers to competition.
As a leading regional ISP dedicated to providing fast affordable internet connectivity to corporate, SME, home and individual customers, this client had come under stiff competition and was looking for sustainable repositioning of the business without having to leave the value-for-money market segment.
Having determined that a value-for-money strategy would serve its short-to-mid-term growth requirements, this client needed to develop a suitable pricing strategy that would profitably balance sales revenue against the business' total expenses.
After detailed review and analysis of the client's financials over approximately a period of four years, we determined that the business' cost structure was bulky, and could be changed to discharge a considerable portion of the business' cost. The resultant margin could then either boost profitability or be used to restructure the company's product offering to obtain grater value without increasing prices.
The ultimate objective was to ensure that the client maintained the level of quality that the market had come to associate with the company with, but offer such quality at a price that the competition would find it difficult to match.
We deployed a combination of variously tailored Activity-Based Costing (ABC) and Economic Value Added (EVA) models to isolate product and process cost build-up, and were able to improve economic efficiency within the client by over 38%.
Following our work on this assignment, the client was able to launch a new range of products, priced far lower than the competition was able to match. The client grew their market share by over 18% in the first year following our engagement, sales revenue went up 23%, and profitability up 39%.
The client was able to raise a substantial amount of funds that it put to business development and expansion, and was at the same time far more easily able to cope with changing regulatory requirements, and especially those that required it to push down the cost of connectivity in its market.