- Pricing has a huge impact on your bottom-line. A slight increase in overall price can produce a large increase in net margin – while a slight decrease can mean you have to sell significantly more to make the same profit
- Without a pricing strategy providing sales discipline your margins may drift down
- General inflation (and in particular rises in your direct costs) will erode your margins over time even if you keep your prices steady
How do you decide on a pricing strategy?
- Increasing prices may drive down demand or reduce your conversion rate but whether it does this, and if so by how much, is a factor of your marketing and sales strategies
o Your choice of market and customer types
o Your positioning in that market
o Your proposition
o Your sales process
- If you get these right then your customers will be less sensitive to price and more focused on the benefits you provide
- Getting these right also means that even if you lose customers you increase gross margin overall (the increased margin more than makes up for reduced volume as shown in the example graph below)
- Those customers who are really price-sensitive are probably not your most profitable customers and you may be able to afford to lose them
- Remember that no customer ever says that the price is too low!What should you do?
- Find out where you are on the curve and adjust pricing to optimise overall margin
- Devise a marketing strategy that lifts the right-hand end of the demand line
Get more advice for business owners here
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