DEAR DAN: Our business is now five years old and growing, but profits have been hard to find. We’re doing everything we can this year to increase our net, including search engine optimization (SEO) to generate more Web sales, marketing to increase sales and cutting costs. What else should we look at?
– Profit Challenged
DEAR PROFIT CHALLENGED: Many businesses make the mistake of trying to increase profits only by boosting volume or cutting costs. There’s another vital component that, oddly, gets overlooked: Pricing.
Millions of business owners are boarding the SEO bandwagon to boost their share of Web traffic. But SEO won’t translate to bottom line success if you don’t optimize prices.
It boils down to: Do you know what your customers are really willing to pay, and why?
Nine out of 10 businesses set prices simply by adding up costs and tacking on a profit margin. That’s the wrong approach, says Per Sjofors, founder of price consultancy firm Atenga Inc. What you need is a pricing strategy that helps you find hidden profits.
Here are six of the worst mistakes small businesses make when pricing products and services:
1. Setting prices around costs and the marketplace rather than value. If a cost-based price is higher than the perceived value, sales take longer, discounting creeps in and profits plunge. Or, if your price is lower than value, you’re leaving money on the table. Accepting marketplace pricing is like giving up on your own strategy.
2. Forcing the same profit margin on different products and services. The profit margin on a separate product or service is totally irrelevant.
3. Putting off price changes for fear of resistance.
4. Pricing the same to all customers. Different customers will be willing to pay a different price.
5. Paying sales people based on revenue rather than profits. Those responsible for selling should be charged with maximizing profit, not just sales.
6. Spending too much time on your least profitable customers. Find out who your most profitable customers are, then apply the 80/20 rule: Expect to see 80 percent of profits from 20 percent of your customers.
Need help assessing where you stand? Atenga has created a free price assessment tool called the Pocket Pricing Audit. Visit www.atenga.com/download. Rapt offers an interactive pricing tool and Price Director software. Visit www.rapt.com.
Daniel Kehrer can be reached at editor@business.com.
