• 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

The latest great idea in business planning is the Subscription Model. One of the advantages is a steady revenue stream. Why is the model steadier? Because a monthly subscription means the customer has to make fewer buying decisions. Additionally, a monthly fee is significantly smaller than an annual or one-time acquisition cost. Great things for the seller, but not necessarily for us as buyers.

What’s the problem? We tend to keep paying for stuff that is no longer proving any value. The price is small, and it takes time to go to the vendor’s website and get off their automatic payment plan. It’s very easy to justify putting off doing something by thinking “I’ll give it one more month and see how I feel then.” This tendency to let these subscription payments can build up to something significant.

Here is what you can do to control these costs. It starts with a Master Control Subscriptions List which shows every on-going subscription that your business has. You can include the start date and when the next automatic renewal is set to happen. Whenever a new subscription is started, make sure that you add it to your list.

Each month reviews your subscriptions list. Make a column for assigning a value between 1 to 5. Next, sort by the last by the value amounts set a goal of dropping at least one subscription out of the low value subscriptions.

Subscription pricing models are going to continue to grow. Currently its mostly Internet based services providing this approach, but creative minds are already expanding it to big ticket items like automobiles. We need to begin developing cost controls to keep this stuff from getting out of hand.