If you break even on an offering, you can't afford to
charge less. But where you do make a profit, reducing your
profit per unit may be useful to increasing your overall
profits. What are the situations you should look at for?
First, you need to think about situations in which having
customers buy more of your products and services would cost
you very little. In doing this evaluation, be sure to
consider what your actual costs would be rather than just
what your standard costs tell you they would be on average.
Unless you have already done Activity Based Costing,
finding out the answer will mean doing some investigating.
You should find out how, when, and under what circumstances
costs will occur and investments will be required if you
sell more. You do need to cover those cash outlays and
costs when they occur.
As part of this evaluation, you should also think about how
you could change the way you provide your products or
services. The potential of making products and services
available at vastly lower prices should change your
perspective.
As you remove price as a barrier to purchase, you will
realize that your offerings have more fundamental
limitations that must be addressed. For instance, how could
you offer new attractive benefits that would influence
customer behavior by adjusting your offerings?
For example, if you sell macaroni, could you add more
appealing recipes that are easy to make that would appeal
to a family on a budget so that they would want to eat
macaroni more often? Could you take this one step further,
and provide a free container of powdered spices that would
inexpensively dress-up the macaroni?
Second, focus on profitable pricing structures that will
make increased purchases of your offerings as close to free
as possible for a given transaction at a moment in time.
Such offerings will often have higher prices for lower
volumes of usage and lower prices for higher volumes.
In extreme cases, there may be an annual charge (such as
the membership in a warehouse club) that permits access.
Such a charge can allow you to drastically drop the prices
on the goods you offer, so that their value and the value
of the membership will both seem higher.
Sometimes, the same result is achieved by having a minimum
charge. If people do not use all of the services needed for
overcome the minimum charge, increased use will be free
until they do.
Third, understand how the cost of your offerings affects
the way your customer thinks about costs. Most companies
are very careful about what new expenses they incur because
of their focus on producing the budgeted profit amount.
However, many costs never affect that profit number. For
example, one reason that investment bankers get paid such
enormous fees is that the cost of those fees rarely reduces
the profits of their clients.
Usually, accounting rules permit the fees that are charged
to be capitalized as a cost of the transaction that has
taken place and are counted on the balance sheet rather
than running through the profit-and-loss statement. Can
what you do be capitalized in some similar fashion rather
than being an annual expense for customers?
If not, you may still have some influence over which fiscal
years the expenses fall into. There may be more budget in a
future year (if a company is coming out of a weak period,
for example), and pricing that allows the costs to shift
between years may well be critical to changing behavior.
Changing when your costs are incurred can also be an
opportunity. Imagine if you had locked in the cost of oil
as a refiner before the big price increases. You could sell
your gasoline at a ten percent lower price than anyone else
and sell vastly more until your hedge position ran out.
Based on your increased volume, you might well be able to
continue to sell at a lower price.
Copyright 2008 Donald W. Mitchell, All Rights Reserved
----------------------------------------------------
Donald Mitchell is chairman of Mitchell and Company, a
strategy and financial consulting firm in Weston, MA. He is
coauthor of seven books including Adventures of an
Optimist, The 2,000 Percent Solution, and The Ultimate
Competitive Advantage. You can find free tips for
accomplishing 20 times more by registering at:
====> http://www.fastforward400.com .
No comments:
Post a Comment