Price is a feature of your product or service and is an important part of your competitive position in the marketplace and a strong influencer of your bottom line. Unlike larger companies that have a lot of levers to pull to obtain long-term profitability, most small businesses must weigh price into account for each sale to maximize profitability, while balancing profit against the need for repeat business and customer satisfaction. Striking the right balance between price, profit, satisfaction, and your competitive position is a key to maintaining a profitable enterprise, over time.
As we approach the end of 2020, there are three important factors to weigh into account when considering whether and how much to increase your price in 2021. A thorough analysis of these factors will help overcome the tendency to resist price changes over fear of a loss of sales or market share. And, be reminded that consistency in applying pricing policies is key. Normally, small and consistent price adjustments are better received by customers than large and random ones.
Market factors are a key consideration in pricing decisions, and should be weighed equally into consideration along with the factors below. Particularly, economic conditions, government regulations, and the emergence of substitutes are key considerations that should be investigated and factored into price decisions.
A simple Google search for your product or service in your targeted geographic area will help identify competitors. Once you’ve identified top competitors, research their price, quality, and pricing strategies. Aside from public domain searches, customers are often a best source of competitive intelligence. Consider your sources of competitive advantage, then position your products and services accordingly relative to price and quality of competitors, in order to offer fair value to customers.
Future Cost Trends
It’s important to be proactive and not reactive when maintaining profit margin. Be encouraged to extrapolate future cost trends for raw materials, labor, and key components of overhead (e.g. medical, supplies, utilities) and make an estimate of the net change in costs for the coming year, based on sales trends. You’ll need to work to offset the net change in costs with a combination of cost-down initiatives and/or price increases, so to maintain or improve your profit margins over time. Increase the frequency of price changes during inflationary periods.
And, remember… The higher your price, the less volume you have to produce to achieve a given dollar amount of profit! Even a small price increase can generate significant amount of incremental profit. For example, if you sell a product or service at 40% Gross Margin, you’ll make the same Gross Profit if you raise your prices 10% and lose 25% of your volume.
Your Coach can be a good source of information about these factors and can offer insights into pricing strategies that will accelerate your success.
Contact us now for guidance on pricing strategies that will maximize your profits.