You already know success requires hard work. In fact, it is hard work on the right things. Based on what successful businesses have done, let me explain what these right things are.

In Part 1 I started with CASH.

In Part 2 I talked about KNOWING YOUR GOOD COSTS FROM YOUR BAD COSTS.

Now I talk about the power of pricing: STOP UNDER-PRICING!

3. STOP UNDER-PRICING!

It is a peculiarity of human psychology that if someone who has been hitting you on the head repeatedly suddenly stops, we feel the warmth of deep gratitude to that person.

You think we might feel anger or at least a desire to assert ourselves, but no: more often than not, we use appeasement to avoid provoking the person into resuming.

During the downturn, chasing business must have felt like banging your head against a brick wall. The huge efforts put into proposals, only to have them rejected at an advanced stage, or the prospective customer defers a decision indefinitely (usually without telling you!)

The promising meetings, the positive signals, the investment in extensive courtship – only to be jilted virtually at the altar. It has been so frustrating!

And now, during signs of economic recovery, these bitter memories still loom large and you really do not want to do anything that you think might jeopardise landing the badly-needed sale.

You will do anything, ANYTHING not to be rejected again but to pull in that order – especially as creditors and bank manager (kept at bay for so long during the tough times) are now losing patience and making unfriendly noises to your business.

You don’t want to seem too expensive. It must be so tempting, as tempting as a chocolate sundae to a chocoholic or as that first beer on a hot summer’s day, to under-price your product or service.

DON’T, DON’T, DON’T!!

Let me explain.

Humans have a wonderful ability to complicate simple matters – and no more so than in the world of business.

Business is about profit (yes, it is about other things as well but a business that repeatedly fails to make a profit is not a business for long).

And what is profit? Profit is what is left when costs are taken away from income.

And what is income? Income is what you get when you multiply sales volume by price.

So there we have it. There is no silver bullet to growing your business during the upturn. Your business can raise its profits by:

a) more sales;
b) lower costs;
c) higher prices.

But not all ways are equal.

Consider a simple statement of profit:

Sales: £4,800,000
Cost of sales: £3,600,000
Gross profit: £1,200,000
Operating costs: £1,100,000
Operating Profit: £100,000

Now, let’s look at what happens when each of the three ways by which profits can be raised are tried. Suppose a 10% improvement in each case:

	Original Scenario	10% more sales	10% off operating	10% rise
Sales	£4,800,000	£5,280,000	£4,800,000	£5,280,000
Cost of sales	£3,600,000	£3,960,000	£3,600,000	£3,600,000
Gross profit	£1,200,000	£1,320,000	£1,200,000	£1,680,000
Operating costs	£1,100,000	£1,100,000	£990,000	£1,100,000
Operating profit	£100,000	£220,000	£210,000	£580,000
Uplift in profit		220%	210%	580%

 

So an increase in prices has the most directly impactful effect on profit as the benefits of a price rise go straight to the bottom line.

To put this another way, the cost to the business in this example of under-pricing by 10% is to forego nearly a 6-fold increase in profits by earning just £100,000 instead of £580,000.

Of course, this assumes that sale volumes are unchanged despite the higher prices. You may feel that is an unrealistic assumption. So what could be possible?

Consider what a mixed approach of, say, just 3% improvement in each case could achieve (3% more sales, 3% off operating costs, 3% price rise):

	Original Scenario	3% mixed approach
Sales	£4,800,000	£5,088,000
Cost of sales	£3,600,000	£3,708,000
Gross profit	£1,200,000	£1,380,000
Operating costs	£1,100,000	£1,067,000
Operating profit	£100,000	£313,000
Uplift in profit		313%

 

So in this example, even a more doable mixed approach can more than treble profits!

In sum, for this business, every 1% rise in prices that keeps sales volumes unchanged, is worth an extra £48,000 in profit. The challenge for your business is to ensure that, in the eyes of your customers, you are worth the prices that you charge.

Have you really invested so little in the quality of the relationships with your customers that they would abandon you if you added 1% or 2% to your prices?

STOP UNDER-PRICING!

Top Tips:

Monitor closely movements in prices of competitors and changes in costs. Be quick to respond: eg is there scope to pass-on “an exceptional fuel cost” when fuel prices rise (and are well-publicised)?

Track profitability at a customer level. Are legacy practices giving away value for nothing? Could discounts be offered for more cost-effective standardised offerings?

Keep close to changes in customers’ needs. Could deliveries be consolidated into a reduced frequency?

Know the price sensitivities of your customers. Your customers place different values on your services: which ones would withstand a 5% rise? a 3% rise? a 1% rise?

Email John Kirwan at: john.kirwan@augmentor-uk.com
Tel. 07818 054645