Small businesses need to step through the uncertainties. Work on increasing sales. Inflation is already here. We are paying more now for our purchases. So increase prices now. Here’s how to do that, for example: If your health care costs are 5% of sales and you expect (or assume) that these costs will increase 20%, that puts health care costs at 6% of sales; the bottom line result is a 1% decrease in margin; to make that up, increase selling prices by 1% to keep pace. Continue to apply this technique to other cost items. Remember, “a penny makes a difference”. A 1% improvement in margins for $10 million in sales is $100,000. That is big-time money! CFO-Pro says “Walk right through that fear! You’ll feel a lot better. Don’t wait to figure out what the government is doing. They will never get it right! Now–what are you going to do?”
Some businesses operate under the assumption that Cash Flow will solve most problems. The thought process continues that if the business generates enough volume, profitability will eventually take care of itself. The end of the free flowing credit markets has challenged that belief. Lack of profitability creates a cycle that will eventually destruct and ultimately dissolve the business.
A competent pricing model will include:
A thoughtful competitive analysis: Really understand your competition. What are their expenses? Overhead? Business Philosophy? Are they profitable? Do they have a sound business model? Will they still be a competitor to you in 5 years? Don’t assume that if their prices are lower, that they are doing something right. They may very well be giving the business away and there’s no need to match pricing under that circumstance. Understand your value and use this information to your competitive selling advantage.
Understand Your Value: The value of the business service is based largely on market perception. What value does the market place on your service? Business purchasers and consumers are very educated now on costs and the value of products and services. You will have to make a strong case for your pricing model and understand what they value to procure the prices that you want.
Know Your Costs: The U.S. Small Business Administration advises that the cost of producing any service includes materials, direct labor (direct and supervisory) and overhead. Overhead costs include all other salaries and wages incurred to run the business, plus rent, utilities, office supplies, insurance, depreciation, advertising, etc. The SBA states a reasonable amount of these overhead costs should be billed to each service performed—whether in an hourly rate or a percentage. You need to charge rates that cover current costs (not last year), including wage increases and inflation.
Determining Your Pricing: In today’s economic environment you will find fall out of competitors. Those that were operating on the assumption that volume will take care of profitability are trying to survive and are no longer formidable competitors. This is a perfect time to assess your business’ profitability and pricing model. It’s also time to re-evaluate. What has worked in the past may not work in this environment.
Three common methods of pricing are hourly rates, flat fees, and variable pricing, where negotiating helps set the price for each customer.
If your pricing model has not been profitable for each transaction in the past, now is the time to evaluate it. CFO-Pro can conduct an analysis of your current model, assess the costs you are allocating to each transaction, determine if there are areas to increase efficiencies and create a model that will help your business compete and win in today’s market. Contact us at 630-269-7646 or email me at firstname.lastname@example.org to learn how to build a sustainable, profitable pricing model.