Lower Prices Mean… More Profits?

Your competition is ever-changing. Sometimes there’s a new shark in the tank and, at other times, one disappears silently into oblivion after losing the battle in the business world. The world of business, as a collective whole, experiences ebb and flow like this all the time. The truly great companies – the companies who are on top for a good long time – are in such a position for good reason. One of them, often, is the ability to adapt to situations beyond their sphere of control, in an effort to bring them at least somewhat closer to a manageable state.

This is where we begin today’s thought: Lower Prices doesn’t mean lower profits. Sounds simple; perhaps, even silly. My experience? You’d be amazed how many business owners and employees don’t understand the concept or, worse, are unwilling to even hear it. I hope that you’ll be different.

The concept, at its core, looks something like this:

Say that you charge $50.00 per hour for a service. This is the rate at which you make optimum profit, while still providing value and covering expenses. In reality, every business has what is known as a ‘Burden Rate’. Burden Rates are the base numbers for inevitable expenses that your business MUST achieve prior to profit occurring. Included in the burden rate are things like rent, utilities, wages, stock – things you need to have paid to make the business go.

Once the Burden Rate is covered, then profit occurs. When you began your business, you ran all of these numbers, and figured out the balancing point between profit and value to the customer. If you didn’t then I’m totally slapping your knuckles with a ruler, virtually, right now while doing my best shrieking nun impression. The great businesses will be able to realize when it is appropriate to tip this scale to one side or another.

On one hand, we have the volume versus return theory. This states that you can have more business, if you’re willing to be somewhat flexible on pricing (coupons and sales do this all the time). For example:

A customer comes to you and says that they cannot afford $50.00 per hour for your services. A lot of businesses would just walk away at this point. Me? I’d ask what fits their budget model better, before I just dismiss them. Let’s say they compel you to understand that $40.00 per hour is all they can manage. Now you have a decision to make. Specifically, how does the $40.00 per hour stack up against your Burden Rate, and your work in house, at any given moment. If your Burden Rate is $21.00 per hour, then you stand to make $19.00 per hour in profit from this venture. Now, you have to consider whether this is worth your time or not. If you’re low on work, then having $19.00 per hour may be a better choice in the short-term than having a full $29.00. Perhaps you can even give this work to a subordinate employee (who makes a lower ‘wage’ than you), instead of doing it yourself. This is where knowing your burden rate is so crucial, because it allows a level of nimble-ness in your business model that will allow you to continue turning a profit, even during leaner times.

Conversely, and much more difficult to find, is the opposite situation. If a customer needs something ‘rush’ or needs a special service that you don’t normally offer, don’t dismiss this either! ‘Rush’ services and un-offered services should be right in your wheel house. And those services need to carry a premium. I once had a tooling vendor say that a buyer from an aircraft manufacturer called her. He needed a thosand clay poker chips for an upcoming event, and didn’t have the time to find them. Know what she did? She found them, bought them, marked them up, and got them to him. Her company made a profit, and she became that much more essential as a business contact for that guy. Where I work (i.e. – my day job) we do this sort of thing all the time. It’s what keeps us in the fore of our customer’s minds, because we’re not afraid of (just about) anything, and they can go to one shop for all their needs (insane or not).

Rush services should also be assessed on a case-by-case basis. Is the customer willing to pay an extra 15% to get it this week, instead of waiting in line? And, if so, can you deliver on this, without disrupting your normal flow of business?

Services that are ‘associated’ – loosely, or otherwise – with your business can also be considered. At Digital Ninjas Media, we offer services that are, in fact, ‘second-tier’. This means that we don’t do the work ourselves, completely, or partially, but – rather – we sub-source it to a vendor who is better equipped and skilled to do it. Sound like a rip off? A lot of folks think like this. But here’s the cold reality: We’ve taken the time to FIND someone who does what it is you want. We’re taking all the risk of getting it done, to your specifications and in your selected time frame. We also take all the risk in paying for the service, before you pay us. And best of all? You only need to deal with one company – there’s no collaboration or chasing things down. This has value. So, in your business model, I would recommend considering what ‘subcontracting’ you can do, and adding a percentage on to that for your trouble. I usually recommend a minimum of 10%. If you can’t get 10%, it’s probably not worth the hassle. But don’t get greedy either! Be fair, and treat your customer’s money as you would your own! Being a vendor is, at its core, a fiduciary responsibility borne upon your business out of trust from your customers: Never betray that trust.

So, remember: sometimes more business, at a lesser price, is better than none at all. And never dismiss out of hand subcontracting or rush work – they’re an opportunity to make money, not a nuisance to be dismissed!

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~ by digitalninjasmedia on September 4, 2012.

 
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