Generate Value and Profits – Profitable Pricing Strategies
Pricing… If it was so easy. I can’t tell you how many conversations we have on subscription model pricing strategies, and we actually develop multiple landing pages with different pricing models. We add different payment options for the same pricing model, models with multiple discount types, full price strategies, and more.
Why do we do that? Why are we so serious about this?
When you are launching a new product, or considering raising prices (or even lowering them) for an existing product or service mix, you’re obviously wanting to capture market share. This of course translates to more sales, more gross margin dollars and ultimately an increase in downstream net profits. And if this is done right, and you’ve simplified to a small set of products and services to offer to a lot of customers (we’ve talked about this in the past), you’re on your way to significantly increasing the value of your company, which is great when it’s time to sell.
So you may be asking, “How do I do this?”
Here are five pricing strategies to generate sales and profits, and ultimately maximize your business value:
1. Target your most profitable products and services first.
We like to repeat things to our readers – we just do. If you could only sell 1,000 units of Product A with an 80% gross margin (that’s $800) or 1,000 units of Product B with a 20% gross margin (that’s $200), which one would you sell? Product A of course. So, why spend all your time and energy doing what you’ve always done, selling the same product and services that aren’t putting money in your pocket AND increasing the value of your company. We’ve talked a lot about subscription models, automatic customers, and the importance of offering fewer things (products and/or services) to a lot more customers versus a lot of things to a few customers. There’s power in being niched and maximum value in simplicity. Buyer’s like it, too. Okay, enough on that. On to pricing strategy number 2….
2. Always Model Pricing Strategies with Gross Margin in Mind
That’s a mouthful I know. Here’s what I mean. It’s great to play around with price increases across a spectrum. “We could sell this product for $5.00, $5.25, $5.75, and $5.97.” That’s excellent, but what does that do to your gross margins? How much more are you making for each unit sold? Should you offer volume discounts? Should you offer a free warranty for 6 months or a year if they pay the higher price? Should you provide a freebie that is included or a discount if you buy more? Every one of these strategies needs to be modeled side-by-side with the cost per unit, so you can see how much gross margin you’re making. If you don’t get this right, your pricing strategy, even accidentally, can wreak havoc with your gross profits when you have an inaccurate accounting of your direct costs. Which leads us to pricing strategy number 3…
3. Understand and Record Your Direct Costs for Accurate and Reliable Gross Margins
S,o what do I mean when I say “Direct Costs?” In a traditional sense, think of Direct Costs as your Cost of Goods Sold or your Cost of Services, if that helps you. If this is still not making sense, answer this question: “What does it cost me specifically to produce and sell my products and services, in terms of materials and labor?”
Here are some thoughts on this:
· Direct Labor. Do you have workers who design, build or assemble your products? Do you have employees who deliver your products or services to your customers? Do you use employees, strategic partners, independent contractors or a combination? All of these costs need to be captured as Direct Labor in your Cost of Goods Sold.
· Direct Materials. Think about all of your inventory costs in raw materials or even finished goods, including spare parts. All of these costs are incurred so you can sell an end product, right? Of course, if you’re a service-based company, this is not important. These costs need to be captured in Cost of Goods Sold as an account type.
· Sales Commissions. This gets interesting. The traditional thought is that Sales salaries, bonuses and commissions are an Operating Expense. But sometimes, it makes sense to capture the commissions in your Cost of Goods Sold. It’s a business decision but something to think about.
· Repairs and Maintenance. I’m specifically talking about the repair and maintenance of equipment used in the production of products and finished goods inventories, including the warehouse. This can expand to the cleaning crews as well. Add in all the costs, including the cost of materials for repairs and maintenance, the labor cost, etc.
4. To Discount or Not Discount – That Is the Question
I don’t want to spend a lot of time on value vs. price arguments, especially value-based billing strategies, which could become its own blog entry. Let me know if you’d like to see something on that. What I want to focus on is ways to offer discounts that increase sales and protect your margins, and ways to do this that help you hone in on the best approach for your business.
First, there are so many ways to offer discounts and incentives to entice your customer to buy more from you. So, I want you to pay attention to your mail as a first step. If you’re like me, I get coupons in the mail from local businesses and mailers from big box retailers and grocery stores all the time. They’re chock full of the best market research on how to offer services from a variety of industries, company sizes, marketing channels (think online eCommerce versus Brick and Mortar). This is research 101 and you might as well learn from others on different ways to offer discounts.
Second, I want you to think about how discounts can help you improve your cash flow. Remember, we ‘ve talked a lot about the value buyers give to companies with strong, positive cash flow engines. If you can offer a discount for cash up front, or set up an annual model where if you pay for a year up front, you get one or two months free, you’re on your way. As I always say, cash is king, right?
Third, none of this will be right if you don’t test market it. We all have customer and lead lists, association memberships, Chamber of Commerce and SBA business lists, email lists, Facebook followers and friends, LinkedIn networks, Twitter/Instagram/Snapchat followers. Segment your list of new and existing customers and potential leads, and market different pricing and discount strategies to blocks of them. It’s vitally important, if you spend the money (very well spent I might add) to create landing pages per pricing and discount strategy, and tie clicks to your CRM to see who’s looking at what. Then, you can watch were your sales are coming from, even looking at when the sales are coming in (clicks, too). Carefully monitor sales, customer interest, feedback, in-bound calls, and more. Then, tweak and modify, until you’ve honed in on the best pricing strategy for you that is the most profitable. Sometimes, you can’t select the most profitable strategy, I know, but if it leads to the most positive cash flow engine, you’re golden.
Hope this has been helpful. There’s a science behind this, but a little elbow grease and due diligence goes a long way to getting this right. As a very successful mentor of mine likes to say, “I like to try things out a lot, but if they’re not working, I switch gears really fast. I’m always tweaking and changing and trying, because every failure helps me learn how not to do it, what I can do better next time.”
Remember, if you’re not making mistakes, changing and adapting, you’ll have trouble really scaling and growing. Always work on your pricing strategies and optimize them, and you’ll achieve great results. You’ll improve your gross margins, increase your net profits and ultimately maximize your business value.
And that, my friends, is worth its weight in gold!