Just as you should know who your problematic customers are and what their true value (or cost) is to the business, you should also know who your best customers are. Very often the Pareto Principle applies to business customers – 80% of the profit will come from 20% of the customers and 20% of the customers will create 80% of the problems. Know which is which and take steps to eliminate those that are draining your reserves and reward those that are adding to them.
Provided a business is offering something different than their competitors there is no reason to have to compete on price. The more your products or services are treated as commodities, the more pressure there will be to keep prices low.
Your pricing policy goes to the core of your overall business strategy. The business owner must chose whether they wish to price at a premium, at parity with their competition or offer discounted prices. Once you’ve decided where your business fits in your market, a realistic pricing policy should be created and set in stone.
In our previous business, we had two main competitors. One company sold a product they claimed to provide the same result as ours and offered it for 50% less than our recommended retail price. Because we believed that our product was the ‘Rolls Royce’ of our market, we never considered reducing our pricing to their level. If a customer challenged us on the difference we dismissed the comparison as not being equal on the basis of quality. This message was clearly articulated throughout our marketing literature and our sales people were trained to emphasize our point of difference on quality and often even encouraged the potential customer to contact our competition if price was their only concern. They rarely did.
We never criticised the products sold by our competition we merely drew attention to our point of difference and held our ground. Let your product or service do the talking for you and always aim to deliver the best you can.
While an increase in price might mean losing some customers, it is possible to lose a certain percentage and maintain the same profit margin. Achieving the same profit while putting less demand on resources means that a business can put more energy into growing.
Let’s look at a brief example of how this works:
Take a business that sells a product for $500 and makes a gross profit margin of 40% or $200 per unit. The owner of this business decides to increase the price of the product by 8% so the new price is now $540 which she believes most of her customers are unlikely to be concerned about.
With the product selling at the new price, the business owner now makes a gross profit of $240 per sale i.e. the original $200 plus the extra $40. Under the original price structure, the owner needs to sell 100 units to make a gross profit of $20,000. By increasing the gross profit to $240 per sale, the business can make a gross profit of $19,920 by selling just 83 units.
What this means is that the business could afford to lose 17% of its customers and still make the same gross profit. It also means that the business may have lower expenses when it comes to servicing customers and will be better placed to offer a quality service to the customers it wishes to keep.
Note that the revenue will be lower but generating the same profit with less demand on resources will leave more room for the business to grow. Remember the saying ‘revenue is vanity, profit is sanity’. The small business owner must concern themselves more with profit and cost control in order to be successful.