Small Business Minute #47 – Pricing For Profit

Pricing For Profit

I’m frequently asked how one goes about pricing their goods and services for profit. It sounds like a simple enough question, but in reality, it can very complex. Get it right and all should be well. Get it wrong and you’ll be constantly chasing revenue, if only to pay the bills.

Now if your product is a “me too”, you don’t have a lot of flexibility, as the existing products have already established the pricing parameters and therefore you must compete accordingly. Raising your price becomes almost impossible. The only way to improve your profitability is either to reduce costs or add real value for which your customers are willing to pay a premium.

First Mover Advantage

Moving to higher quality or higher value allows you to break free of the commodity pricing, but with potential trade-offs. Chances are you’ll reduce the number of customers but add much higher profits on every sale.

Conversely, if you have a unique product or service, you can leverage the “first mover advantage” and command higher prices. This is because there is no opportunity for your customers to do any comparison pricing, because you’re the only one.

I leveraged this “first mover advantage” when I started the Marketing Resource Group. I expected to maintain my higher margins until such time as competitors caught on to what I was doing. Once that happened, I fully expected to reduce my margins, but that never happened and I maintained my premium pricing and margins.

Unfortunately, the vast majority of businesses, especially new businesses, are not sufficiently unique to enjoy unlimited pricing power. So how do you establish an initial price formula for that new product or service?

A Formula

What I have found to be an effective jumping off point is to use the 1/3, 1/3, 1/3 formula. This formula simply breaks down your costs into fixed and variable and then add the profit element. In practice, it would look something like this:

Fixed Costs                 $1 (33%)
Variable Costs            $1 (33%)
Profit Margin             $1 (33%)
_____________________
Selling Price               $3

Is this a definitive formula? Absolutely not! But it does give you a wonderful starting point to establish your initial pricing target. In reality, many businesses have higher fixed or variable costs, in those cases, the fixed and variable costs shouldn’t exceed 2/3rd in order to protect your profit margin.

I’m sure there are many more complex pricing theorem out there, but this has worked me and my clients in helping to establish some pricing parameters. It forces you to identify all the actual costs that go into your product or service. Once these costs are identified, you can then layer on your expected profit margin starting with a 1/3.

Adjust Your Profits

By using this simple formula, you will actually be able to see how much profit you expect to make. This is of particular value when you end up in a competitive situation and need to be a little more aggressive in your pricing. Chances are you can’t adjust your cost base, but you can adjust your profit. Seeing how much or how little profit you’ll make on a given proposal, let’s you decide whether it’s worth doing as you’ll no longer be guessing at how much, if any profit you’ll make.

Over time, you will build up enough information on this new product or service to be able to refine or develop your own formula. In the meantime, this Pricing For Profit formula takes out some of the guesswork.

You may also like Revenue Without Profit Is Pointless

I’m Greg Weatherdon, and this has been your Small Business Minute.

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Small Business Minute #46- Make It Better Later

Small Business Minute #46 Make It Better Later

 

Far too often I come across entrepreneurs who can’t seem to launch their new business, product, service or even a new strategy. They are constantly tweaking it, in an attempt to make it better or even perfect the final offering.

What they fail to realize is that they’re wasting valuable learning time by not being in the market. Regardless of when they finally do launch, chances are they are going to need to make adjustments anyways once they receive customer feedback, so why wait?

“Far too often I come across smart people who create wonderful solutions for problems that don’t really exist.”

If you have a working prototype or framework for your service, my advice is get to market as soon as you can. By waiting you could be wasting valuable resources on developing features or benefits that no one cares about. Far too often I come across smart people who create wonderful solutions for problems that don’t really exist. It’s better to find that out sooner rather than later.

Going to market as soon as possible with the minimum acceptable product or service will get you that all important feedback from the initial clients or presentations That way you can now focus your efforts on things that really do matter to the customer and not what you think matters.

So, if you’re wondering when to launch, do it now, because you can always make it better later.

I’m Greg Weatherdon and this has been your Small Business Minute.

Copyright © Greg Weatherdon 2017

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Small Business Minute #45- Branding vs Reputation

Small Business Minute #45 Branding vs Reputation

There’s a lot of time and energy wasted by small businesses on the whole concept of brand building and little on reputation. So much of this noise can be traced back to the explosion of Social Media and if the truth be told, that’s all most of it is, noise.

To be honest branding any kind of service business has always been a challenge and is best suited to products. The exception to this is when a service business reaches a size and scope that no longer qualifies it as a small business. The primary factor is that most small businesses have difficulty defining what business they’re actually in and any attempt to develop a brand is a lesson in futility.

Personal Relationships

Think about how you react to certain businesses. There are many large organizations whereby you don’t have a personal relationship with anyone, yet you have come to trust their products or services. That’s because they have consistently lived up to or exceeded your expectation and you’re more likely to try a new offering from them. Contrast that now with a small business. Typically, you’ve met the owner and/or received a referral from someone who has. The distance from the top of the organization to you, is very short. It’s a personal relationship, their reputation.

What most successful entrepreneurs focus on is not creating a brand but of creating a great experience for their customers. Doing so, has built a reputation that is far more powerful than any manufactured brand.

Delivering a consistent service that customer are willing to tell their friends about is something that can’t be created. It has to be earned and is far more enduring and profitable as people will be willing to be put on a waiting list in order to deal with a company with a good reputation. For those who aren’t willing, they are probably not our target anyways.

The Smaller The Company, The Less Your Brand Matters-It’s About Your Reputation

Focusing on your reputation is a far better use of your time and effort than trying to create a brand. By simply making sure you treat the customer fairly, do what you say you’re going to do and fix any problems immediately. Doing so, goes a long way to building a great reputation. I don’t know about but I would much prefer to deal with a small business that has a great reputation over a great brand.

I’m Greg Weatherdon and this has been your Small Business Minute.

Copyright © Greg Weatherdon 2017

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Small Business Minute #44- Want More Sales? Follow Up!

Small Business Minute #44 Want More Sales- Follow Up!

One of the simplest ways to increase your sales closing ratio is by simply following up with your prospects in a timely manner.

All too often I encounter entrepreneurs who lament at how difficult business is or that they just don’t get sales even though they are pitching and quoting.

Digging a little deeper quickly uncovers one of the main reasons for their poor sales performance, they don’t follow up. It is estimated that 85% of sales contacts are never followed up.

When I enquire as to why they don’t follow up, I usually get the same answer- “I don’t want to bother them or come across as pushy’. To this I typically respond by saying “they asked you to quote, so a few follow up calls is not considered pushy, if done in a professional manner”

People Are Well Intentioned

When you consider that people lead busy lives and although well intentioned, they sometimes need a little friendly nudge in order to take action. I can’t tell you how many times a prospect has thanked me for following up with them- which is certainly in contrast to what we would expect.

By following up, it also gives the serious prospect the opportunity to ask questions or get answers to things they thought of since our last meeting and more often than not, if it doesn’t result in an immediate order, it certainly moves the process along and keeps me in contact with the prospect.

So if you want more sales, follow up.

I’m Greg Weatherdon and this has been your Small Business Minute.

You may also enjoy No Sales, No Business or The 80/20 Rules For Sales

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Small Business Minute #43- Wisdom Of The Ages

Small Business Minute #43 Wisdom Of The Ages

experts

Successful people are always on the lookout for ways to improve themselves and their businesses. Unfortunately, with the advent of Social Media, there are now an overwhelming number of so called experts promoting the latest and greatest way to take you and or your business to the next level.

Scream Loud Enough

I get the sense that they believe that if they scream loud enough or post frequently enough, people will automatically assume that they are experts.

Rarely however, have these denizens of success achieved the level of achievement they proclaim that you can attain. Just because they say so, doesn’t make it so.

I like to say “that most of the people making money on the internet are those individuals selling you courses on how to make money on the internet”. Buy their book, sign up for their course, and you too will become successful.

Granted, there are some individuals that have actually achieved success in their chosen field and are now sharing and yes, capitalizing on their knowledge they gained over a lifetime and you know what? That’s okay. Unfortunately, they’re in the minority.

Get Experts To Help

A simple and effective alternative, is to find someone in your community that you admire, that has done their time. and is successful. Offer to buy them a coffee or lunch to get some insight into their successes and failures.

It has been my experience that truly successful people are willing to help and share and most don’t care how many likes, followers or friends they have on social media.

Their strength and knowledge comes from experience. Or as an ancient proverb says “Age is the price of wisdom”

I’m Greg Weatherdon and this has been your Small Business Minute.

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Small Business Minute #42- Successful People Do The Hard Stuff!

Small Business Minute #42 Successful People Do The Hard Stuff

No one likes doing hard stuff. It’s far easier and requires far less motivation to do the things we like. Great concert pianists produce wonderful music in what appears to be an effortless manner. Top ranked Olympians appear to have superhuman abilities and successful entrepreneurs have an air of quiet self-confidence.

What We Don’t See

The one thing all these individuals have in common, is that they put in the time and effort required to develop and refine their skills. What we don’t see is the hours upon hours, year in, year out that the pianist has spent practicing at the keyboard. Nor do we see the Olympian training long before the sun comes up, when they’d rather stay in bed.

The successful entrepreneur is not excluded. What we don’t see is the copious amounts of information they consume in their off hours or the mental gymnastics they perform as they try to distill this new knowledge into an actionable strategy all the while keeping up the daily demands of their enterprise.

Believe me, these individuals would prefer not to have to work so hard, given that there is no guarantee of success. But they do!
Regardless of the repeated disappointments and failures, they just don’t quit!

They just pick themselves up and keep on grinding it out, with only their thoughts to keep them company, because successful people do the hard stuff.

I’m Greg Weatherdon and this has been your Small Business Minute.

You may also enjoy Small Gains, Big Rewards

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