Profitable pricing is a virtuous circle if you get it right and a vicious circle if you get it wrong. So, how do you get it right and price profitably?
How profitable is your pricing at the moment?
Astonishingly, too many businesses simply do not know how profitable their products and services are because their management accounting processes are not up to the task.
It’s not just the costs and revenues that need to be measured.
If yours is a service business then time literally is money and logging time spent on each client, at least in a way that is “roughly right” and not “precisely wrong”, will provide invaluable information about whether you are performing client work profitably.
So step one is to make sure you have the management information you need to measure profitability accurately. Step two is to act on it.
Be competitive but profitable
There is no doubting that the business climate is tough. Our blog on Darwinomics explored the need to be competitive and pointed out some of the opportunities too.
But competitive does not have to mean cheap and you do not have to abandon profitable pricing. There is only room for one lowest-cost firm in your market and if that is not you then compete on other aspects of your product or service such as:
- delivery times
- customer service
- understanding of your client’s business
Look at your competitors and see what fronts they are fighting on (or not) and look beyond your own market for ideas about how to position your business so that it stands out from the crowd.
Have the confidence to walk away
Sometimes when you make a pitch that embraces profitable pricing the client or prospect will say you are too expensive. It’s important to negotiate but one of the options here is to walk away – you just need to be polite and have the confidence to do it. There is no point in”buying” sales with low prices that you can not make money from.
You might be nicely surprised at the reaction when you walk away – the buyer might really quite like you and be prepared to pay what you want simply because you are the best!
Of course it is worth thinking about the lifetime value of a client. Establishing a good working relationship now at lower prices than you would ideally like might be the foot in the door for a long-term relationship in which you can increase prices or lower the costs of doing the work in the future and make the profits you want.
If you adopt this approach then make sure you are clear that prices will go up so there are no surprises. Offer an introductory discount, fix the price for six months only, think how landlords offer rent-free periods, there are lots of examples of how to do this so you do not end up with permanently low prices and a contract you can not make money out of.
The virtuous circle of profitable pricing
It is simple – profitable pricing falls straight to your bottom line. This translates into more money in the bank, provided you deliver what you promise and are on top of credit control, and the value of your business increases.
But it is more than just a financial thing. Everyone feels better in a business that is performing well. Some of the profit can be reinvested in training, in new products, new markets and rewarding everyone involved.
And, of course, pretty much the opposite happens when you don’t get it right.
Good luck with your next pitch!
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