Setting the most profitable prices
By Marty McGhie
I can demonstrate the relationship of pricing to the costs of your business in a discounting example: Let’s assume that you have decided to target an 8% return to your bottom line as a corporate goal and your pricing is structured as such. In an effort to secure a large job, however, you offer your customer a 10% discount off your $20,000 price, thus dropping it down to $18,000. While this strategy may secure the job, you now have to figure out a way to make up the lost $2000, all of which came straight off the bottom line. Let’s further assume in our example that you have four additional jobs you are bidding on that would typically average $5000 in price. In order to make up the income lost in the discount for the previous job, you will have to mark up these four jobs to $5500 each-certainly, this now becomes a tougher sale to make versus the discounted sale to your other customer.
While this is a simplistic example, it illustrates the danger of offering consistent discounting without considering the fact that the costs of your business will remain the same. As a result, your bottom line can quickly erode.
One customer at a time
The final key to effective pricing is knowing your market. Once you understand the costs of your business, you then must determine the highest price that your market will bear on a given job to sustain the most profit possible.
The best way to understand your market is one customer at a time. If you have forged strong relationships with your customers, this may be achieved by simply discussing your pricing structure with them. Most quality customers aren’t really interested in getting your products at the very cheapest price possible; rather, they want a win-win relationship where they receive the right product at the right price-a price that allows your business to make a legitimate return. Just like everyone else, you will have your share of customers focused only on the cheapest price possible, but they should be the exception, not the norm.
You can maintain positive profits by working with your clients as business partners instead of adversaries. Comprehending your customers’ needs in relation to their price points and having open discussions with them will help both of you maintain a profitable partnership. This is the simplest way to understand your market, one customer at a time.
While these three keys to successful pricing are by no means all-inclusive, ensuring that all your employees are on board with your pricing philosophies, fully understanding the costs of your business, and knowing your marketplace will be a great start to building a pricing program that will generate long-term profitability for your company’s future.
Marty McGhie (firstname.lastname@example.org) is VP finance/operations of Ferrari Color, a digital-imaging center with Salt Lake City, San Francisco, and Sacramento locations.