Pricing Tips to Improve Profits
Many entrepreneurs mistake large sales as the ultimate measure of success. The truth is that it is the net profit that is the better metric. Even if you have a lot of sales, this won’t count if you have little or no profit at all.
I once wrote an article on the common errors of pricing. To follow up that article, here are tips on how to sell at a profitable price.
• Do not give unnecessary and/or excessive discounts. There are many disadvantages to discounting and you must be very careful to weigh if it’s better to reduce your price. The worst effect of this is the impact on your profitability. A ten percent discount may not seem much if you have one hundred percent mark-up, but if you factor in other expenses like overhead, its impact will be more apparent. For example, if your net profit is twenty percent of sales, then a ten percent discount would cut your income by fifty percent. It takes a huge increase in sales to make up for a small discount.
• Study what your clients value. This may seem obvious, but it is not at all easy to know what customers really want and how much they are willing to pay. This is less of a problem in industrial sales, where there is usually an established procedure. It takes a lot of market research and actual experimentation to decipher this. Relying on gut feel alone is very risky. If you have a better grasp of the needs and desires of your clients, then you can better tailor your offerings. You may reduce or eliminate items that customers do not need, or you may add or increase that which they lack. A strong trend nowadays is the observation that more people are willing to pay more for great games they can play on their phones than on the phones’ durability.
• Avoid those just getting bids. We had experienced this thousands of times when we had an ad in the yellow pages. For many organizations, it is standard procedure to get at least three suppliers to bid on an item. What usually happens is that there is already a favoured supplier and they just need to get a couple of companies to bid too so that they can comply with the rules. One sign of this is if they are not that concerned with the details. After all, they will not be buying from you anyway. Another indication that they may not really be interested is if you are given a very short period of time to submit your proposal.
• Give them two prices instead of one. Our experience with the yellow pages ads led to this strategy. Although the majority of those who called us already seemed to have a favoured supplier, the remaining callers that were serious seemed to consider only the price. This presented us with a dilemma since the only way we could offer a low price is to lower the quality. After considerable thinking, we decided to offer two prices. One price, which is very low, is for the basic product, while another somewhat higher price was for our premium offering. We took pains to explain that it would be best to choose the better item because we believe that in the long run, it is the best value. The result was amazing. Not only did we get more sales but since most customers chose the premium item, we also had higher margins.
• Avoid those whose only consideration is price. The only possible way you can make a profit here is if you are the lowest cost producer. But sometimes even having the lowest cost would not allow you to make money because there may be competitors that are willing to take a loss just so they can have something to do. Not only are you unlikely to benefit from those whose only consideration is price, you may also be forced to make or sell products that are below your standards. This will have negative long-term effect on your company’s reputation.
• Do not negotiate under pressure. When you are desperate to get the sale, you are at the mercy of the buyer. Your price may be driven so low that you will eventually go bankrupt if this is the way you usually do business.
• Sell in bundles. Learn from the fast food chains. See if your product or service can be sold in bundles. There are many benefits from this tactic. First, you are able to help the consumer decide because there is a very strong tendency for buyers to select the bundled items not only because of the savings, but also because it simplifies their decision making. Second, when the total purchase amount is increased, you also decrease your cost per transaction. Third, you are better able to forecast demand since those in the bundle will likely move in tandem. Fourth, you are able to put in your higher margin items in the bundle. And finally, it reduces the risk of errors in serving the order since you know what items are included in each bundle.
The price of your product is the most important variable in determining its profitability. Despite this, many people do not understand the many creative possibilities that can be done with pricing to maximize profits. A great pricing strategy is one of the few things you can do to increase profits without incurring additional expenses.
*Originally published by the Manila Bulletin. Written by Ruben Anlacan, Jr. (President, BusinessCoach, Inc.) All rights reserved. May not be reproduced or copied without express written permission of the copyright holders.
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