In Nigeria and beyond, businesses often prioritize revenue growth over profitability, neglecting the importance of recovering costs. This oversight can lead to financial difficulties, as costs such as transportation, electricity, and employee salaries quietly erode profit margins. According to Dr. Olufemi Ogunlowo, CEO of Strategic Outsourcing Limited, companies must understand the true cost of serving customers, including indirect costs like supervision, technology, and compliance.
The problem of unrecovered costs is particularly prevalent in service-based businesses, where costs can be dispersed across various departments and operations. This can make it challenging for management to identify and address the issue, as no single cost appears threatening. However, collectively, these costs can render a profitable contract uneconomic. Companies may continue to serve clients at a loss due to prestige or fear of losing volume, but this approach can ultimately harm the business.
Commercial discipline begins with knowing the true cost to serve, including direct labor and materials, as well as indirect costs. Organizations must understand how these costs are funded and prioritize pricing reality. This may require leaders to walk away from business that appears impressive but destroys value. Turnover can be misleading, and cash and sustainable margin tell a more truthful story.
Pricing decisions should not rely solely on the sales function; instead, commercial teams, finance, and operations must collaborate to ensure sound decisions. Unrecovered costs often hide within apparently successful contracts, and management may celebrate revenue growth while margins quietly disappear. This issue can be particularly deceptive in service businesses, where additional costs may be spread across people and departments.
The lesson for businesses is simple: revenue is not value unless the economics of delivering it are understood. Organizations should strive for visibility into the full cost of serving different customers, products, and locations. They must distinguish between deliberate investment and accidental subsidy, and make conscious decisions about pricing and resource allocation.
Companies should resist the temptation to recover hidden losses through future optimism or by maintaining volume at any price. Strategic relationships deserve investment, but this should be done with an explicit rationale and exit point. A disciplined company knows when to renegotiate, redesign, or walk away from a contract that destroys value.
Ultimately, commercial courage is essential for sustainable business growth. Little costs accumulate just as little savings do, and losses are built over time. An enterprise becomes sustainable when it respects arithmetic early, recognizing that every cost ignored today will eventually return tomorrow with consequences. By prioritizing commercial discipline and visibility, businesses can avoid the hidden dangers of unrecovered costs.
Key points
- Companies must understand the true cost of serving customers, including indirect costs, to prioritize pricing reality and avoid financial difficulties.
- Commercial discipline begins with visibility into the full cost of serving different customers, products, and locations.
- Leaders must have the courage to walk away from business that appears impressive but destroys value, prioritizing cash and sustainable margin over turnover.
