• Jim Payne

I believe that better profitability is an overlooked tool for improving a business owner’s life. Higher profits allow people to send their kids to better schools, take better vacations, and save more for retirement. Profits also produce the cash needed to make better investments in the business and higher pay for the employees.

It’s nice to say that you are for more profits, but just how do you make that happen? I have found three major approaches to achieving higher profitability:

· Have a written business plan that is reviewed and updated regularly

· Invest in your pricing system

· Control your overhead costs through better processes

Writing a business plan forces you to do the critical thinking. Conflicting goals become more obvious. The reality that you don’t really understand your own strengths and weaknesses suddenly becomes clear. Addressing these problems in your planning is what makes it more likely that good decision making will result.

A typical business owner hates to have a prospect reject a quote and as a result we tend to leave a lot of money on the table. A good pricing system will allow you to constantly experiment with how you present the value of your service or product to get that higher sales dollar. Increasing your sales prices by just a few percentage points can often double your net profits.

It took me a lot of years to discover the key to controlling overhead costs. Controlling the processes that consume the overhead is the only thing that works. Rather than demanding that a company save money by buying fewer paperclips, change the processes so that fewer paperclips are required.

  • Jim Payne

Cost plus some additional amount for profit is the more traditional approach to pricing. However, economists tend to recommend the value pricing approach as being the sounder approach to pricing. Unfortunately, value pricing is a lot harder to do since the business owner never really knows what the customer value amount is at any one moment. Nevertheless, businesses are moving towards value pricing as the way to maximize their sales prices and ultimately their bottom line.

Here are some of the more common pricing models:

Cost-plus pricing models:

1. Cost plus a percentage markup

2. Single flat fixed fee

3. Unit pricing – i.e., cost per employee

4. Industry standard pricing – i.e. union rates

5. Hourly rates for time spent

6. Blended hourly rates – team rates rather than individual rates.

7. Competitive price matching

8. Annual contract with inflation increases

Value pricing Models:

1. Base price plus optional add-ons – Instead of bundling a bunch of services, you break them down to their most basic categories and let the customer add on the features they are willing to pay for. An example is the airline ticket in which meals and luggage are an additional charge.

2. Menu pricing – The customer is given a good, better and best option for a bundle of services. This seems to be the norm for most web-based software services today.

3. Demand-based dynamic pricing (surge pricing) – The price is constantly adjusted based on demand. Think of Disney and the price differences between busy and non-busy days.

4. Percentage pricing – Think of real estate commissions which are based on a percentage of the sales price.

5. Component-based menu pricing – To buy a computer from Dell, you go to their website, select the model, and then add all the components that you want included.

6. Auctions – The ultimate in value pricing where customers bid against each other to determine who values the product the most.

7. Contingent pricing – This is mostly seen in the legal profession where they only get paid if they win.

8. Pay what you want – The very scary approach of leaving the price completely up to the customer after the service has been received.

These are just a few of the pricing models available for consideration. Getting your price right is the single best thing you can do for your business’s profitability.

  • Jim Payne

It took me a lot of years to get my head wrapped around this concept. Value billing is an attempt to price a product at what the customer values that product rather than the seller’s value. Traditionally, sellers have priced their products using either their cost plus a markup, time spent at an hourly rate, or some survey of what prices their competitor’s use for the same product. All of these pricing methods have pluses and minuses in their application, but in the end, it still comes down to what value the customer places on the product.

How do you price something using the customer’s value set when you really don’t have a clue of what they think about your product? Currently, the way we apply Value Billing is to help out clients build packages with three different pricing options. The Good, Better, and Best package approach allows the customer to select which package fits their needs and pocketbook. Designing what goes in to each package is where the art is. Usually, we try to make the middle package the one that most customers select. The low-end package is typically the absolute minimum to get the job done and therefore the one that appeals to maybe 15% of the customers. The high-end package is the most interesting in that we try to make it as expensive as possible. This tends to make the middle package look even more appealing.

Converting pricing systems from the traditional approaches to Value Billing has produced an interesting phenomenon – our guesses at which package customers would select have turned out wrong most of the time. Customers who we thought would buy the cheapest package for sure, many times went for the middle or even high-end package. We have come to realize, that in spite of how well you think you know your customer, you really don’t know them very well at all when it comes to how much they are willing in spend for your product.

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