Home›Resources› Current Newsletter › July 05 › Price For Profit & Peril of Discounting

Remember, when your customer says 'you are too expensive' they are really saying '...I do not perceive requisite value in your product or service’'.

SME business owners are often guilty of having little idea of what sets them apart from their competition. They do not know what they do better or what even their competitors do better. How can an SME owner possibly determine a valid value proposition in this situation?

With no value proposition in place SME’s are more afraid of losing a customer than they are focused on making sure each sale is PROFITABLE. So the only basis on which they think to compete is price.

This is a business model designed for those that embrace mediocrity and failure. How do I Price for Profit?

First, it helps to understand that customers are not actually buying a product or service. They are buying a SOLUTION to a perceived problem or need. Fill that need at a price they can afford and you’ll have no shortage of potential buyers for your product or service.

Importantly notice the statement of 'at a price they can afford'. Not 'the lowest possible price'. Not 'cheaper than our competitors'. A price they can afford. A price that is less than or equal to the perceived value of the product or service.

The business owner needs to know if the price they’re charging allows them to make the desired level of profit. How do you find that out? Add up all of the costs associated with producing your product or service. Then, add in a percentage for overhead (rent, utilities, payroll, taxes, etc.). The percentage will be different for every business, but make sure you build in enough mark-up to cover overheads. Finally, add in your desired percentage of profit. You need to charge at least this much to cover your costs and generate a profit.

It is this simple. All that is then needed is some sophistication to account for the mix and range of product or services you sell.

Does that mean you set your price there? Not necessarily. If you can show your customers that your product or service will save them time, money and/or aggravation, you may be able to charge more. How much more? That depends on how much time, money or aggravation you can alleviate for each customer. Depending on your customers and your product/service, you may be able to charge a LOT more.

Will the customer pay this price? Yes, provided you convince them, in ways important to them, that you are different and better (than competitors).

Having set the price (determined your value proposition) beware the pitfall of discounting. SME’s notoriously discount, ‘to match competitors’, ‘because they are good customers’, ‘ to generate cash flow’, ‘to get the sale’.

Below is an example of the way discounts and reduced prices may impact your profitability.

If you sell your product or service at a gross profit of 40%:

• Offering a 5% discount means you need to sell 14% more volume to make the same dollar amount of gross profit
• Offering a 10% discount means you need to sell 33% more volume
• Offering a 20% discount means you need to sell twice as much
• Offering a 30% discount means you need to sell four times as much; and
• Offering a 40% discount means you don’t break even no matter how much you sell!

These numbers also work in reverse. The higher your price, the less volume you have to produce for a given dollar amount of profit! Even a small price increase can generate significant additional profit.

So instead of competing on price for price sensitive customers reach a whole new group of value driven customers by offering them a value proposition attractive to them. Then enjoy the additional profitability and reduced workload.

Use that increased profit to BUY YOURSELF SOME TIME for the strategic work of reducing your costs, laying the foundation for growth, and researching new market opportunities. Reducing your costs ultimately allows you to reduce your prices while maintaining the same level of profitability, but you need time and money to create that value for your customers and for your business. Don’t sell yourself short. You and your business are worth it!

If you can use some help contact our Business Development Officer, to invigorate!