If you said Suzy could make 20 cookies, that’s not a bad answer. Your business will do fine during the good times. But you’ll be out of business at the next bad market, new competitor or economic downturn. The best answer is 29 cookies. Remember, the question was not how many can she cut from the sheet of dough. Rather, it was how many can she make. Suzy B. manages her waste stream. By pulling together all the remnant pieces of dough and rolling them out again, Suzy B. is able to produce 9 more cookies from the same amount of dough.
Sure, we’re just talking about cookies here, but the same principle applies to every other business too. We’ll go into that more in a little bit.
To make this more real, let’s say the sheet of cookie dough costs $10 and the total of all other costs (baking, wrapping, branding, etc.) is 10 cents per cookie. It costs Suzy A. $12.00 to make 20 cookies, which she can sell for $1.00 each and make a profit of $8.00. Suzy B.’s costs are slightly higher ($12.90), but she makes more from selling the larger number of cookies. So her profit is $16.10.
However, if Suzy B. decides to cut her cookie price to 75 cents each she’ll still make more profit than Suzy A. And since her cookies are 25 cents cheaper, she’ll sell more than Suzy A. In fact, Suzy B. could cut her cookie price to 50 cents and still make a small profit ($1.60), while Suzy A. would be losing a dime on each cookie she sold at that price.
This is a pretty simplistic example, but it shows how Suzy B. was able to dominate her market and make lots of money just because she was able to reduce her waste from 33% down to 3%. You could do the same in your business.
