Planning for Profitability
The best way to do that is to make a profit isn't that cute? The best way is to make a profit and here's how you plan for profitability, you start by process, pricing your product for profitability. It is amazing how many products are priced kind of on a whim, not based on knowledge of consumers and not based on knowledge of what it costs to produce and market that business. You have to price for profitability, you have to control costs there's two ways to turn a profit charge more, make it cost less so you really have to start by pricing it right and then make sure you're controlling costs of so that what your prices and getting gobbled up by whatever it costs you to produce it. And if it's costing your time that's another reason why you really need to put an hourly rate on your time even if you're producing products. So you begin to know what really is it costing to produce this product, not just to buy the materials for the product, you have to have plans for dealing with unprofitab...
le customers. This is particularly for going concern businesses. A lot of your businesses are probably serving clients that that you like, you may have a love, they've been with you a long time. They're not profitable, they're keeping you from profitable customers, so one of the things you do to plan for profitability is decide how you are going to deal with unprofitable customers and how you're going to deal with unprofitable products. This gets back to the chart I showed you in the last session. What makes money? Which of your revenue streams which of your products and the ones that aren't making money? You have two choices. Figure out how to make them profitable or figure out how to move them along. Here are five pricing truths value matters more than price we all think we have to keep our prices low so that customers will be well, this is another slide that a little bit mixed up, but any way you can still figure it out value more matters more than price customers by value. They don't say I'm no, I'm not going to pay thirteen dollars, they say thirteen dollars is too much for that offering. How do they determine the value they add up? Quality features, convenience, reliability, expertise, support and trust brand trust in a split second, they look at your price and they think what quality made getting do I like the features this they do a little juggling act to decide what the value of your product is, and the price has got to be a little less than the value they think they're getting if they think the price is a little more they will not buy it now people are price sensitive you always hear that term but they're not price sensitive across the board price matters a lot less when products are difficult to find and compare when they're purchased rarely when they're considered essential or highly desirable or emotionally sensitive or when they're one of a kind I always say people don't get price sensitive about open heart surgery it's rare it's essential they needed they care about one thing how good is that doctor and it doesn't hurt that insurance is paying for it so when someone else is paying for it that helps too but um the more difficult you can make what you offer to find and compare the more you can charge for the more you can offer something one of a kind the more you can charge for purchase really that's not what you want but it does reduce you want something you want people to want your products frequently but this is the difference between buying a dishwasher and buying dish soap nobody price compares on dish soap the way they compare on the dishwasher for instance because one is a more important purchase in the other if it's considered essential or highly desirable or emotionally sensitive of car is often emotionally sensitive and so people actually are in the long run less price sensitive they'll actually pay more because they want to drive that kind of car and you want to make your business one that is has such emotional attachment that they are emotionally attached to because they think it gives them more more reputation, more steam, more value mohr itjust differentiates and at that point they will care less about what your prices and the more you could make it one of a kind price options lead to higher purchase price is all research shows that if you offer a menu of prices, people will not buy the least expensive. If you on ly offered to prices, chances are they'll buy the least expensive think about you going in to buy a glass of wine and there's three kinds of wine there's a number of kinds of wine on the menu in a in a restaurant you really buy the cheapest one now there's only two and one's five and one's nine you might buy the five, but if there's four, five and nine you're probably by the five people tend to buy not the rock bottom when given a choice. So think about how you can offer a choice of prices price presentation affects prices acceptance so as you presenting your prices make the price is easy to read so many businesses when it comes time to buy, the customer cannot figure out what it costs particular input personal service people want to know how much is this going to cost and service providers? Well, I charged thirteen dollars or thirty five dollars or three hundred fifty dollars an hour. Well, but how much is it going to cost? All you have to say it's typically, this kind of thing is falls into this price range. All they want is some answer that they can understand. Make your price is easy to read and understand. Avoid disclaimer, small print and the word plus plus scares people to death make your discounts and price deals worth while don't ever, ever, ever offer ten percent off. Nobody cares about ten percent off. They can get a coupon online to give them ten percent off, so make your deals worth while and lead with your most appealing option. Find out what people buy most of the time and that's what you lead with, and then you give them the other options. Price cuts and we talked about this earlier. Somebody asked about changing prices all the time. Price cuts hurt your profits and your market position. When you change prices all the time you confuse people in brands are built on trust and confusion, erodes trust and therefore hurts brands. People want to know what they can count on before you slash your prices. Promote limited time offers. That right? You know, between now and the end of the month we're seeing a lot of interest in this I want to get it in your hands were offering it in this way limited time offer creative live offering this course for seventy nine dollars well it's live that's a limited time offer and I'm only put money on the fact that more people buy it while it's live and cheaper or re broadcast and cheaper than when it's full price just because people like limited time offers type price reductions to product adjustments, we've just you know made this change and therefore so therefore it doesn't look like you cut your prices you adjusted something and you're passing it along offer lower pricing for higher volume sales normally this is a one hundred dollars an hour but if you buy ten we have a seven hundred fifty dollars package you know whatever so they feel and then offer discounts to incent slow period buys this is the happy hour the happy hour model um nobody was coming in during that period they want your business they made it cheaper now in fact they also made the portions smaller but you feel you're getting a good deal and it's convivial people like the idea of happy hour so anyone as you get ready to set your prices define your value proposition first what valued you do do you deliver what value do they place on your offering? How does that value compare with the offerings of your competitors? The's air financial questions you need to answer because if you have a higher value, feel free to charge a higher price, but if they have a stronger brand and therefore a higher value in a lot of minds, then you're not going to get away with a higher price. Set your prices to cover your costs plus profits, which means you absolutely have to know the cost of your products. Set your prices to inspire the desired purchase activity. If you learn that when people come in and purchase with a friend, they buy a whole lot more. Then set your prices so that you have two for one offers, knowing that by coming inning buying the cheaper price, they're going to buy a whole lot more. Anyway. You want to incent the multiple people come in, figure out what you want to incent and figure out ways to build your pricing around that and set your prices to sustain your business, and this gets back to knowing what it cost to run your business and what it's going to cost to keep it in business, nicki bie is just asking very quickly. Is there any best practices you should follow in terms of showing your pricing? They're asking for example should you show the most expensive first to the least expensive particular terms of product packaging what do you think that that's not really particularly relevant to your model? I think you should show solutions for customers seeking this this is what we offer for customers seeking this so that they can align their interests with your products rather than your pricing they are not buying your price they're buying your solution you the price is what you get out of it the offering is what they get out of it so as long as you're talking about prices they're focusing on prices they know you're talking to yourself so reverse it here are solutions these air the top these particularly for a service business very hard for a service business to set their prices but it's not hard to say to give you a sense customers come to us for the following you know primarily for the following six offerings and hear our price range is for each to get your thinking started of course we want to make your project completely unique and we'll work with you on an estimate on a free estimate or whatever once you developed prices as you develop prices you have to incorporate what it's costing you to produce it and usually that involves setting an hourly price a service based business let's say a service based business the owner wants to make fifty thousand dollars a year and they have annual fixed costs of thirty five hundred dollars a month between their rent and their billing service and all these different things. So their annual fixed costs, or forty two thousand dollars a year. Did I say a month I many year fifty thousand dollars a year? What they want to make, forty two, is in fixed costs. Variable costs are six thousand. They have total salary and costs, or ninety eight thousand dollars a year that's what they have into their business, they need to make that much, not to lose money a year. Ok, then they want to add a profit margin because every business needs dad in a profit margin. So they say they want ten percent profit margin on this business. So they have to add in ninety eight hundred dollars, which is ten percent of ninety eight thousand. So they come to an annual amount of money that they want to make her exceed one hundred seven thousand dollars, eight hundred, one hundred seven thousand eight hundred dollars a year. Then they divide by the number of billable hours they can sell a year, which is one hundred seven thousand dollars. This amount of money divided by fifteen hundred sixty hours now what that fifteen hundred sixty hours is is seventy five percent two thousand eighty hours a year you have two thousand eighty hours you could sell a year, you're not going to sell that many you absolutely have to save twenty five percent for non bailable time so you can sell that many hours if you sold every single one of them at sixty nine dollars and ten cents an hour you'd make one hundred seven thousand dollars so then you have to ask yourself will my clients pay sixty nine dollars an hour? If not, you have a couple choices develops in new revenue streams or lower your costs or salary because as long as that's your salary and these are your costs that's how much you have to make if all you're selling his billable time, that ought to inspire you to find some alternate streams of revenue but that's how you can set your billable hours now if you sell um setting hourly prices based on rates so this is a service business projection again, this is service business because it is the most frequent form of freelancing business you have total hours available by year, forty times fifty to two thousand eighty less twenty five percent you get down to your fifteen sixty if you charge fifty dollars an hour, you're going to make seventy eight thousand dollars a year you take away your fixed costs, you take away your variable cost, you have profit of thirty thousand dollars which is the one I really wanted you to see, which is how to come up with your hourly rate and then if you sell products in still instead of service you still have to calculate your time into it it's so concerns me that so many of you don't pay yourself so a service business example you want to pay yourself fifty thousand dollars a year and you do the same math and you know, something happened to these slides and I'm so sorry to say this, but we're going to ignore that slide too because it doesn't give you what you need to know. Yes, it does kate you want to sell, you want to have a salary of fifty thousand dollars a year you want a genuine projected annual costs of thirty, five hundred a month? You've got forty, two hundred thousand dollars in costs all together you have ninety two thousand dollars in salary and costs, so you have to take that to come up with your hourly rate of fifty nine an hour then you want to add your profit margins so you need to charge sixty four ninety an hour same thing we came up with in the last one but because you're selling a product, you have to say how many hours is involved produce this product. This is particularly important for an artist or a jewelry maker let's take a jewelry maker that person says it's going to take me three hours to produce each piece of jewelry so that means they have one hundred ninety four dollars of cost of time cost into each product and then they're gonna have material costs that they have to add in and let's say each piece costs a hundred dollars a material costs they need to charge two hundred ninety four dollars for that product and if you work backwards you'll make sure you're covering all costs including your salary and you know what's wrong here this should have said product that's why I got thrown out this is a product business example but somebody who's creating products with using a personal service and I want you to think about this each time. What did you what is your time worth? You're running your company and your hourly time what's that cost and factor that into what you charge for service or what you charge for the products that you're pricing fifteen sixty that's just be hours not dollars right fifteen sixty divided by fifteen sixty three hours in the year thank you warn and then once you set your prices, you have to assess whether they're feasible will customers pay the price doesn't match your value and competitive position if you are known to be really the top contender in your tear, go for the highest price if you're known to be kind of a low cost option who's really best known for doing it fast versus doing it with a really, really high reputation, you can't go for the highest price does it meet your salary needs and expectations? Will it support you? Does it allow for price increases? If it's already at the very, very top of what you're ever going to be able to prise him? Frankly, the only way you're going to sell it is by putting it on sale occasionally, then it's not a good price because it gives you know the elasticity, no ability to alter your prices. Does it cover spoilage, uncollected revenue mistakes? Can you augment it with complimentary revenue? These are the things you have to put that price through before you said it, and when it's time to revise prices, which a lot of you probably are going to do as you realize that you're not paying yourself enough in the way that year that you're, uh, funding your business, you have two choices you can increase or you can reduce prices, you can introduce a range of prices, which is a really nice way to raise prices while still leaving a customer with control you could unbundle or create pet product packages and price them, so if you're currently selling on lee guaranteed products, you could think about selling products with a purchase? A guarantee option you know, you could unbundle that if everything includes free delivery, you could back out delivery saying so many of our customers or contractors wanting to cash and carry it. We're going toe break it out that way. But for those of you who want delivery, it's still, you know, very reasonable price or whatever you can offer trial pricing incentives, you can offer promotional pricing versus a sale, a promotional pricing we just got in the new offers and so on last year's for a limited time, we're doing this or that creative life offers promotional pricing, you can offer price and centers for large or contract orders. Again, this comes down to what kind of purchase do you want to incent and get more of a by making that you're most preferential pricing and you can introduce financing or payment options or new ways to pay all of that leads you to profitability once you price it correctly to cover all your costs, including your operations and things like spoilage, your mistakes then you are ready for profit, and here are the teams of terms involved. You hear it all the time, but not everybody understands it in the black is when revenues exceed costs, red ink is weighing costs, exceed revenues. Fixed costs are ongoing expenses that rarely change, including rent, salaries, utilities, although a lot of you don't pay yourself salaries so that's, not a fixed cost, I wish you would variable costs expenses that fluctuate depending on business and production activities. One time costs are many startup or expansion expenses, and cash flow is when money you make comes in and money you spend goes out, and when you expect an excess or deficit of available cash, that's cash flow is when it comes in, when it goes out, and what points do you need more than you have, or what points to have more than you need when you have more than you need that's positive cash flow, and that should be an objective. Next thing you have to do is control costs, and I am totally not a fan of across the board cuts across the board cuts, cut muscle as well as fat, go through you are of a small business, go through if you need to control costs, and say what costs are not contributing to our strengths, and tomorrow we do the strengths and weaknesses analysis, and you want to make sure that every strength your business has stays strong, you don't want to cut anything that contributes to your strength, but anything that isn't directly contributing to your strength, you should consider how to trim that cost, first thing to do is to find lower priced suppliers. We are all allegiant to our suppliers, but it's worth it to say, is it truly better if we could get justice good a product at a lower price because we need to increase our profitability, reduce your payroll and benefit costs if it doesn't reduce morale or business vitality? Sometimes there are ways to, particularly when somebody's quitting anyway to decide to begin to subcontract that there's no harm. You haven't hurt anybody, nobody got fired, but you decide to handle that expense differently. Look for ways to reduce payroll and benefit costs and conservative recycle the good for the economy. Good for your business, good for your brand a lot of times if you can sell it as another way that you add value to your community but it's also a way to control costs obtained competitive bids, especially those of you are in long term relationships once a year, make it a policy that you obtained some competitive bids obtained favorable prices in terms, don't hesitate to ask for deal signing contracts. Bulk purchase deals, find ways to get what you need cheaper and especially in an environment where material costs keep changing, you might be ableto lock in some businesses, some purchases that some materials that end up giving your business a competitive edge. We find your processes go through how are we doing this and how can we do it better how can we do it more efficiently and sometimes that takes bringing in a consultant to help you walk through and figure out how can you refine your processes as part of this you end up formalizing your processes which makes your business more assailable more transferrable and refine your product designs to eliminate unnecessary costs identify the customers that require high maintenance for no or low profit who abuse your policies who damage a profitability and morale or who don't pay your bills everybody has some of these I did an article called when to fire a customer actually that wasn't my headline it was the headline that was given to it it has it's it's just been reprinted everywhere the globe in you kate president I think there were a thousand comments on it both people feeling that that was a bad term fire your customer but most people saying you've got to do it sometimes and you do it with the same level of customer service you would give to your best customer you say you know what? We're not a fit here's what I've looked out for you here's a better and you help transition them to a better solution but you get them out of your business especially if they're abusing your policies proposed changes to improve the relationship assistant transit transitioning to a new supplier the other thing you have to do is identify which products have high costs, which ones have low profitability, which ones have low growth potential. The's air the ones you either have to change or de emphasize. You have to strategize changes to the cost structure, processes or marketing, and you have to decide to withdraw, revise or reinvent unprofitable products products based on findings because products go through a life cycle. There's the launch there's the introduction when you launch it and sales just take off, then competitors enter, invariably competitors enter and you have to increase promotion. This is kind of a growth period, then you hit maturity. The product is mature, it's well known, it takes very little to keep it going. People are buying it, and then growth slows. Either they have what they need, or they found somebody else and then price wars or come to many competitors there and so price war start, and that erodes your profitability sales decline. You have two choices. Withdraw or reinvent the product, and you have to always look at where your product isthe or you're offering is in this arena and how you're going to either withdraw it, replace it with something else, or reinvented to revitalize it, but understand every product, including your services, does go through this