Tag Archives | pricing for profit

Markup Percentage Calculation

See Also:
Margin vs Markup
Margin Percentage Calculation
Retail Markup
Gross Profit Margin Ratio Analysis
Operating Profit Margin Ratio Analysis

Markup Percentage Definition

Define the markup percentage as the increase on the cost price. The markup sales are expressed as a percentage increase as to try and ensure that a company can receive the proper amount of gross profit. Furthermore, markups are normally used in retail or wholesale business as it is an easy way to price items when a store contains several different goods. Now, look at the markup percentage calculation.

Markup is great. But if you aren’t intentionally pricing for profit, then you’re missing out on some opportunities for big improvements. Click here to download your free Pricing for Profit Inspection Guide now.

How to Calculate Markup Percentage

By definition, the markup percentage calculation is cost X markup percentage. Then add that to the original unit cost to arrive at the sales price. The markup equation or markup formula is given below in several different formats. For example, if a product costs $100, then the selling price with a 25% markup would be $125.

Gross Profit = Sales Price – Unit Cost = $125 – $100 = $25

Now that you have found the gross profit, let’s look at the markup percentage calculation:

Markup Percentage = Gross Profit/Unit Cost = $25/$100 = 25%

The purpose of markup percentage is to find the ideal sales price for your products and/or services. Use the following formula to calculate sales price:

Sales Price = Cost X Markup Percentage + Cost = $100 X 25% + $100 = $125

As with most things, there are good and bad things about using markup percentage. One of the pitfalls in using the markup percentage to calculate your prices is that it is difficult to ensure that you have taken into consideration all of your costs. By using a simple rule of thumb calculation, you often miss out on indirect costs.

(NOTE: Want the Pricing for Profit Inspection Guide? It walks you through a step-by-step process to maximizing your profits on each sale. Get it here!)

Markup Percentage Calculation Example

For example, Glen started a company that specializes in the setup of office computers and software. He decided that he would like to earn a markup percentage of 20% over the cost of the computers to ensure that he makes the proper amount of profit. Furthermore, Glen has recently received a job to set up a large office space. He estimates that he will need 25 computers at a cost of $600 a piece. In addition, Glen will need to set up the company software in the building. The cost of the software to run all the computers is around $2,000. If Glen wants to earn the desired 20% markup percentage for the job, then what will he need to charge the company?

(Looking for more examples of markup? If so, then click here to access a retail markup example.)

Step 1

First, Glen must calculate the total cost of the project which is equal to the cost of software plus the cost of the computers. Find the markup percentage calculation example below.

$2,000 + ($600*25) = $17,000

Step 2

Then, Glen must find his selling price by using his desired markup of 20% and the cost calculated for the project. The formula to find the sales price is as follows:

Sales Price = (Cost * Markup Percentage) + Cost
or
Sales Price = ($17,000 * 20%) + $17,000 = $20,400

In conclusion, Glen must charge the company $20,400 to earn the return desired on cost. This is the equivalent of a profit margin of 16.7%. For a list of markup percentages and their profit margin equivalents scroll down to the bottom of the Margin vs Markup page, or you can find them using the above markup formula. Using what you’ve learned the markup percentage calculation, the next step is to download the free Pricing for Profit Inspection Guide. Easily discover if your company has a pricing problem and fix it.

markup percentage calculation, Markup Percentage

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markup percentage calculation, Markup Percentage

(Originally published by Jim Wilkinson on July 24, 2013.)

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Benefits of Using Margin

What Are the Benefits of Using Margin in Pricing?

Do you know your gross margin? What about your profit margin? Your company’s margin indicates whether it is profitable or not. A company can have an extraordinary volume of sales, but without the proper gross margin built into the economics of the company, it results in an unprofitable business.

Start pricing your products or services to result in profit every time. Click here to download our Pricing for Profit Inspection Guide to begin.

The profit margin is the amount that sales (revenue) exceeds costs. So if your profit margin is low, then it may mean that you are making little to no money at all. Setting the correct price on a product or service is the key to profitability. You want it high enough for you to make money, but low enough for products and services to still sell.

Use margin to help you calculate exactly how much you are trying to make per unit, how much you need in order to break even, and most importantly, how efficient the company is.

Margin vs Markup

It is easy to interchange and confuse both terms of “Margin and Markup.” After all, they are remarkably similar. But when it comes to the bottom line, they are recorded and calculated different. Terminology speaking, markup percentage is the percentage difference between the actual cost and the selling price, while gross margin percentage is the percentage difference between the selling price and the profit.

For example, suppose the price of a product is $100, and it costs $80 to make. Both the markup and the margin would be $20. We calculate the profit margin percentage by dividing $20 by the $100 selling price and that equals to 20%. However, we calculate the markup percentage by dividing $20 by the $80 cost and the markup percentage would be equal to 25%.


Price for profit with our Pricing for Profit Inspection Guide.

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It is very important to remember that there are more factors that affect the selling price than merely cost. What the market will bear, or what the customer is willing to pay, will ultimately impact the selling price. The key is to find the price that optimizes profits while maintaining a competitive advantage.

Focus on the Profit Margin

A company’s main focus when it comes to pricing should be based around their profit margin. The margin measures the efficiency of a company when using their labor and raw materials in the production process. The profitability of a company relies on the established profit margin. For this purpose, a company should spend the proper time and effort to calculate the perfect profit margin for their industry and needs.

Pricing for Profit

Discover your company’s perfect price for maximum profitability. As you analyze the benefits of using margin, it’s an opportune time to also take a look at your pricing. Download the free Pricing for Profit Inspection Guide to learn how to price profitably.

Benefits of Using Margin

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Benefits of Using Margin

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Maximizing Your Bottom Line In 3 Simple Steps

Sales are great, but wouldn’t they be better if you were actually able to reap the rewards? Many CEOs that were not trained with an accounting/finance background struggle to understand profitability. They think that if sales are great, then the business is great. But when sales increase, inventory and overhead increases. Productivity also decreases – due to exhaustion or overwork. Collections lapse because there isn’t a “pressure” to collect. And unfortunately, that is when companies suffer the most. Sales start to decline, but they don’t change their habits. In this Wiki, you will learn how everything below sales on your income statement is critical to your company’s success and how you should be maximizing your bottom line – net income – at any stage of your company’s life cycle. Let’s look at how maximizing your bottom line in 3 simple steps can happen.

What is the Bottom Line?

First, what is the bottom line we are referring to? It is the net income on your income statement or P&L statement. This is what you have left after all the costs of goods sold, administrative expenses, and overhead have been subtracted from revenue. We look at this number carefully because that is how much you are able to put into retained earnings or reinvest back into your company. In addition, the amount can be used to issue dividends to their shareholders. Maximizing your bottom line should be an integral part of your company’s processes.

Profitability starts at the top of the income statement. If your prices are not set to create profitable environment, then you will be not able to maximize the bottom line. Learn how to price for profit using our Pricing for Profit Inspection Guide.

Maximizing Your Bottom Line In 4 Simple Steps

There a are several ways to maximize your bottom line – some more extensive and time consuming than other. But there are 3 areas to focus on to maximize your bottom line – including productivity, overhead, and collections.

1. Productivity is Key

It’s been a common theme among business blogs and news sources (Entrepreneur, Forbes, WSJ, etc.) to improve productivity. Why? Because productivity is key in maximizing your bottom line. But what really happens when you improve productivity? You have more supply, decrease the cost to produce 1 unit, and increase sales. It speeds up your operations so that you can fulfill more orders for quickly.

2. Manage Overhead

Great revenues have very little meaning if your overhead costs are not properly managed. Look deeper into your overhead expenses and find out if there are any costs you can reduce or completely remove. The problem is often more complex than large expense accounts on the P&L. You must interact with various departments to think critically and solve problems. Ensure that every single overhead cost is necessary to provide the desired service levels. Maximum controllability over costs leads to higher profits for the company to reap.

3. Collect Quicker

Collections are an important part of business. If a company sells $10,000 worth of product but only collects $3,000, then their cash is tied up in inventory, etc. As a result, they experience a cash crunch. We have worked with clients who were in the same situation and they neglected to ever collect the outstanding balance. Their bottom line suffered, but they didn’t think to look at their collections process. There are two metrics that you can look at to monitor collections and use to collect quicker.

The first metric is DSO. Do you know your Days Sales Outstanding (DSO)? This is a great measurement to know where you are currently and how by making slight adjustments, you can increase profitability. Use the following formula to calculate DSO.

 DSO = (Accounts Receivable / Total Credit Sales) * 365

The second metric to look at is Collections Effectiveness Index (CEI). This is a slightly more accurate representation of the time it takes to collect receivables than DSO. Because CEI can be calculated more frequently than DSO, it can be a key performance indicator (KPI) that you track in your company. If the CEI percentage decreases one month, then leadership are alerted that something is going on. The goal here is to be at 100%.

CEI = [(Beginning Receivables + Monthly Credit Sales – Ending Total Receivables) ÷ (Beginning Receivables + Monthly Credit Sales – Ending Current Receivables)] * 100

Another method to collect quicker is to tie receivables to the sales person’s commission. This will not only encourage your sales team to be part of the collections process, but it will help keep your company cash positive.

Effective Strategies for Improving Profitability

While we’ve been focused on maximizing your bottom line as your current financials stand, we also wanted to share some effective strategies for improving profitability.

Price for Profit

Are your prices leading to a satisfying net income?  If not, then these are some questions you can inquire:

  • Are additional costs being reflected on the price?
  • Are you using Margin vs Markup interchangeably?
  • Is your overhead being covered?

The solution might be simple: Adjust your price!

Learn how to price for profit using our Pricing for Profit Inspection Guide. This whitepaper will help you identify if you have a pricing problems and how to fix it.

Create Standard Operating Procedures (SOP)

Also, create Standard Operating Procedures (SOP). SOPs are step by step instructions written by a company to assist employees in completing routine procedures. They are necessary in a company to ensure operations run smoothly. The better your company’s SOPs are, the more efficient it will run. Create operating procedures that are simple, easy to read, and most importantly make them lead to a purpose.

Focus on Profitable Customers

Identifying profitable customers is instrumental to a company’s success. Once you completely identify your most profitable group of customers, focus your attention on them. Use your marketing funds primarily on you most profitable customers. A customer outside of that target market is still a viable customer, but they just shouldn’t receive as much marketing attention since they are not their primary and most profitable customer segment.

When maximizing your bottom line, start with your prices and pricing process. Access the free Pricing for Profit Inspection Guide to learn how to price profitably.

maximizing your bottom line

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Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

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Increasing Pricing on Products

increasing pricing on productsRecently, Netflix – streaming service giant – increased their pricing on two of their products by more than 10%. At first, media and customers displayed anger and backlash. But after the pricing increase, many customers remained at the increase was approximately a $1 difference. Plus, you have to factor in that many people are “cutting the cord” from traditional cable companies and converting to streaming services, like Netflix, Hulu, and Amazon Prime, for their entertainment. Netflix isn’t the first company, nor the last, to increase their pricing on products or services. But how to you manage to increase pricing without losing customers?

Increasing Pricing on Products

Increasing pricing on products is a result of various things – such as increased costs, additional services, improved quality, etc. When a company decides to hike their prices, we found that it stemmed from either two things: costs increased or they had their economics wrong in the first place. The other big one is taxes.  Taxes actually increase prices.  Companies that have their act together and run a streamlined operations will capture even taxes in their costs, even it is “below the line”.   Be assured when taxes go up, so do prices to the end user.  One of our goals when we work with clients to be more profitable is to look at their prices. Will increasing the price retain more customers or drive them away? Will there be more value added to compensate for the increased prices? When do you increase prices and how?

When to Increase Prices

Timing is everything when you want to increase prices! If you time it wrong, then customers will be annoyed that they didn’t get the special or backlash because their monthly payment just increased a certain percentage. Netflix timed their pricing really well. Because they were releasing a new season of House of Cards, Stranger Things, and The Crown (all of which have been award winning and original content) within the next month or two, Netflix was able to communicate added value. For that extra $1, you will get more seasons of your favorite shows.

But what if you aren’t a streaming service? For example, you may be a Tax CPA firm. If you needed to increase prices for your services, then the wrong time would be in the middle of the tax season. Find those gaps between the rush of customers and communicate the value – even if you aren’t necessarily adding anything new. Be sensitive to price increases and avoid the “shock” factor.

How to Increase Prices Effectively

When you have figured out the timing of when to increase prices, you have to answer the question, “how to do it?”. As a financial leader, this is where you cross lanes from the accounting department into the operations, sales, and marketing departments. You know the economics of your company, but if the salespersons cannot sell the product/service at that price, then it will fail.  I actually had a CFO tell me that they had a “pricing problem”.  Come to find out, they did not have a pricing problem.  They knew exactly what the price needed to be, they had a management problem because the sales guy did not want to put pressure on his buddy who is the buyer.  I guess the sales guy was afraid of losing the invitation to the annual fishing trip.

Pricing is a sensitive subject. We get it. But are you pricing your products to result in profit? Click here to download our free Pricing for Profit Inspection Guide.

Add Extra Offerings

One of the things that we have found with our clients is to add something “extra.” For example, Company ABC wants to increase their price on widget A from $80 to $150. They don’t have any other products, but they need to increase the prices so that they will be profitable. Instead of losing customers that may not be able to afford the $150, Company ABC splintered their products into three separate items – priced at $47, $56, and $89. Once a customer saw value in those smaller products, they opted-in to purchase the $150 product.

This is also a numbers game. When you provide extra offerings, you are able to capture more market. Hopefully, you will be able to promote those purchasing the cheaper products into a higher price range.

Adjust the Product

While this option isn’t necessarily increasing pricing on products, it is changing the cost structure and improving profitability. This tactic is used frequently in restaurants. Have you ever frequently visited a restaurant and your favorite meal started getting smaller… Yet, you were still paying the same price? Many companies chip away parts of the product to reduce costs, and therefore, increasing the price per plate, ounce, etc.

increasing pricing on products

Occasionally Run Specials

Think of that customer that is very price conscious and sensitive. Every once in a while, offer your products with a discount – essentially bringing it back down to its original price. This is a great way to retain previous customers that were conditioned with their prior expectations. Retailers do this all the time.

Change Your Customer

Increasing pricing on product often brings to light the fact that you have the wrong target audience. For example, one audience is highly sensitive to price due to the currency exchange. While another is less sensitive. Explore what it would look like to focus on that preferred audience. Maybe your specialized expensive item belongs in a specific industry that values your product, and not in a more general industry that maybe does not need or appreciate it.

Do Your Homework

Increasing pricing requires a lot of work on behalf of your marketing, sales, and operations team. If you are increasing pricing on products, are you absolutely sure that you will not have to do it again in the next few months? Because this process is an undertaking, do your homework and research the costs of your product. Will there be anything that could influence your costs?

When is the last time you had a price increase?  You would be surprised how many times we speak to a business and they had gone years without a price increase.  These companies are not evening covering the cost increase attributed to inflation.

Increase Pricing on Intervals

Service companies frequently use this pricing tactic. They increase their pricing after a 6-month or 12-month membership. It’s expected. Sure, you may have customers that work around the system – finding new services, signing under a different name, etc.

Examples of Recent Price Hikes

While we have discussed extensively about Netflix, there are other industries, companies, and areas of the market that are having to adjust to a) the loss of customers, b) the increase of costs, and c) growth.

Movie Theaters or Cinemas

Before the era of streaming networks and DVRs, movie theaters or cinemas were all the rage. That was the only place you were able to watch new releases before you could purchase their respective DVDs. But as we have seen, more potential customers choose to stay home and watch on their home television instead of going out. Maybe this is caused by generational preferences. Regardless, movie theaters are having to increase product to compensate for decreased customers AND add value. Theaters are now offering fully stocked bars and restaurants, reclining chairs (or pods), and creating a high scale environment. iPic Theaters is a great example of how the environment of movie watching is changing.

Price for Profit

Whether you are increasing the prices of your products in the next couple of months or years, it’s important to price them right the first time. Oftentimes, when we work with our clients, we find that their pricing was not resulting in profits. After seeing this so often, we developed a Pricing for Profit Inspection Guide that you can access here for free. Download the free Pricing for Profit Inspection Guide to learn how to price profitably.

increasing pricing on products

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Black Friday

See also:
Traditions Turned Financial Fluctuations
Improving Profitability – Fuel for Growth
Product Life Cycle Stages
Beware of the J Curve

Black Friday

In America, Black Friday is an event that is not only the most shopped on day during a typical year, but it also generates huge sales.

“Only in America do people trample others for sales exactly one day after being thankful for what they already have.”

~Author Unknown

Black Friday Definition

The Black Friday definition is a retail store sale that occurs the Friday after Thanksgiving – an American holiday in November. Many consider this event to be the kick-off to the Christmas shopping season. Many retailers, such as Walmart, Kohls, Kmart, Macy’s, Express, and other major retailers, open their stores in the early hours of the morning to receive the first rush of customers. Door busters, sales, huge discounts, and giveaways are all part of this event.

The History Of Black Friday

Let’s look at the history of Black Friday. Black Friday originated in 1952 as the start of the Christmas shopping season. Because many states in the United States considered the day after Thanksgiving to be a holiday as well, retail shops realized that there were enormous amounts of potential shoppers available during this four-day weekend. But since 2005, this event has launched into record numbers for sales, shoppers, etc. For example, sales dropped for the first time since the 2008 recession in 2014. Yet, sales boasted $50.9 billion over that weekend.

Although not all states in the United States permit workers to work on national holidays or even the day after Thanksgiving, companies have broken many boundaries to take advantage of this rush of customers. Over time, retail stores and e-commerce platforms have expanded on Black Friday to include Cyber Monday. It’s become a tradition to many.

Cyber Monday

Because Black Friday became such a hit, online companies created another shopping event – Cyber Monday. It occurs the Monday after Thanksgiving and encourages shoppers to purchase more gifts and things on Monday. Originally, it was launched in 2005.

The Cost of Black Friday

While it may be tempting to join in on Black Friday specials and sales, you have to consider the cost. Remember, a sale isn’t necessarily a good sale. It has to be a profitable sale.

Some of the costs associated with Black Friday include.

How to Win on Black Friday

In order to win on Black Friday, you have to price your products for profit. Especially since you project to sell large quantities of product, you need to make sure you don’t start with a pricing problem. If you cut prices off a product that is already not profitable, then you will loose more potential profit. Before you start planning for Black Friday, make sure your pricing is in check. Click here to download our Pricing for Profit Inspection Guide.

Price for Profit During These Sales

Each sale you make has to return a profit. Therefore, you need to allocate as many costs to each good to make it easier. How much inventory do you need to push in order to turn a profit? But also, what prices are customers willing to spend? The trick with Black Friday is that since everyone is competing for the best deal, you must know what others are pricing the same product at.

Reduce DSO by Turning Over Inventory

The risk for big sales like Black Friday is that there will be some that cancel their credit card transaction for $1,800 worth of product. Because you are putting a lot of cash up front to increase inventory, you need to collect cash as quickly as possible. For example, you can offer discounts for cash only. For other pricing tips, download the free Pricing for Profit Inspection Guide to learn how to price profitably.

Black Friday Definition, History Of Black Friday

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Black Friday Definition, History Of Black Friday

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Traditions Turned Financial Fluctuations

Traditions turned financial fluctuations

Traditions turned financial fluctuations are to be expected in the American economy. Commercialism takes over this time of year with the holiday rush. With an overload of red sales tags on toys, electronics, clothes, and more, consumers are quickly adjusting to this being a norm.  Now with Thanksgiving is right around the corner, we are taking a look at how it has changed drastically from a traditional national holiday to a massive sale.

Financial fluctuations can severely damage your profits. Learn how to price for profit as we go into the most popular sales season! Download the Pricing for Profit Inspection Guide here

Traditions Turned Financial Fluctuations

Financial fluctuations generally shape patterns throughout industry seasons, with one of the largest humps being in the last quarter of the year (especially for retailers). As a financial leader, it is your responsibility to allocate resources to cope with the massive influx of sales, manage profitability, and mitigate any potential liabilities with hosting a sale.

Traditions turned financial fluctuationsHistory of Thanksgiving

Thanksgiving originated in 1621 when the Wampanoag Indian tribe and the colonists shared a meal together after the first successful corn harvest. In 1863, President Abraham Lincoln declared it a national holiday. The tradition is to express one’s thankfulness while sharing a hearty meal of turkey, stuffing, veggies, and a variety of pies.

While the holiday still remains a tradition to this day, the past few years have seen Thanksgiving invaded by the financial juggernaut of Black Friday.

Black Friday

Black Friday is one of the most sought after sales days (for consumers at least) in the United States. Traditionally, Black Friday takes place the day after Thanksgiving in the wee hours of the morning. People camp out to get the best deals on clothes, appliances, technology, etc.  Over the past few years, however, retailers have begun opening their doors to Black Friday shoppers earlier and earlier.  This year, many stores will be open on Thanksgiving day for holiday shopping.

As it’s evolved into an expectation for businesses to have great deals, we’re now starting to question the profitability of this type of event. With Black Friday being a commercial norm, Brown Thursday (Thanksgiving day) and Cyber Monday (Monday after Thanksgiving) are rapidly being seen as just another leg to this madness.

Traditions turned financial fluctuationsWalmart

This massive company is an infamous example of Black Friday hysteria. Having had deaths during their sales in the past due to stampedes of people, Walmart has continued to expand what was originally a Friday sale to a continuous sale starting Thursday at 6pm (in most stores).

Let’s tally up all the costs associated with putting Black Friday (Brown Thursday and Cyber Monday) into action:

  • Employee’s hourly pay (and potential overtime)
  • Manager compensation
  • Product stock and inventory
  • Crowd control training
  • Security to help manage crowds
  • Electricity of buildings, lights, and registers
  • Food for staff (Thanksgiving dinner for employees)
  • Time to price each SKU profitably
  • Liability insurance (in the case of casualties)

Traditions turned financial fluctuations

With all of these extreme sales, companies like Walmart have been able to stay profitable as this “holiday” has grown into a giant. One of the major factors that go into that is inventory. By acquiring a large amount of inventory, you minimize the cost per item and thus create a more profitable ticket item.

Putting Black Friday into production is not cheap. In addition to all of the above, the most important thing is to make sure your products are being priced for profit. Profitability is the number one thing that you need to keep in mind, as you have a responsibility to company stakeholders.

RTraditions turned financial fluctuationsEI

By contrast, REI, an outdoor recreational equipment retailer, has opted-out of participating in Black Friday festivities. Financially, they may have missed out on a slight increase in revenue.

But the real question is, what’s the best decision to make for your brand? Some decisions to gain more profit while going against values may actually compromise your company and result in a loss. No amount of pricing products for profit can counteract any decision that is against the brand.

Traditions turned financial fluctuations

#OptOutside has been a movement that aligns with REI’s mission and vision.  They are able to maintain their customer base and grow year over year without offering the Walmart-style sales. This tradition has smoothed over typical retail sales cycles.

One of the main differences between Walmart and REI comes down to the price difference on their products. REI sells higher quality, more expensive, and sustainable products. People who are seeking their equipment are not the type of customer that demands cheap products.

Deciding whether to host a sale throughout out the holidays? Make sure you have priced your products or services for profit. Download the Pricing for Profit Inspection Guide to help you price accordingly and point out areas where you are not currently producing profit. 

Seasonal Sales – Good, Bad, or Ugly?

With all things, there’s a good, bad, and ugly side to it; seasonal sales are not excluded from this.

The Good | How it Helps Businesses

Seasonal sales help businesses around the country and the world. Projections can be easier when a company knows when its sales will peak and decline.

Start by creating a yearly plan. If your company does not do anything besides one big day, analyze typical sales and cross-analyze them with your goals. How are you going to survive the gap?

Offer Other Products/Services

There are many options to subsidize a limited season. Offer those products or services that are popular in-season to another target market. Another option is to create other seasonal sales within the calendar year.

For example, a company that puts up Christmas lights in October-December will find that their off-season takes up the majority of the year. This provides an opportunity for you to adapt. This particular company uses their same inventory (Christmas lights) to do wedding decorations in the April-August months. While it does not completely match the winter sales, they are able to keep up the cash flow throughout the year.

The Bad | How it Hurts Businesses

With all things good come bad. Traditions turned financial fluctuations are not exempt from the bad.

External Dependencies

Depending on one single event, such as Black Friday, for the majority of your yearly sales, is a risky affair! If something externally occurs before or during said sales event, the entire event could be disastrous. But for some companies, that’s all they have.

If you find yourself in this position, it’s time to start finding other sales methods that do not heavily rely on one-time events surrounding holidays, etc.

Staffing: On-boarding & Overtime

It’s often said that a company spends most of its money on people. Seasonal sales only expands these issues. With these financial fluctuations, companies hire seasonal employees. Training, on-boarding, monitoring, salary (typically hourly for retailers), over-time compensation, and any other forms of employee care are just a few factors that hurt businesses if not managed carefully.

The Ugly | Seasonal Cash Flows

Seasonal cash flows are difficult to project and track. This is one of the really ugly parts of having high financial fluctuations.

Price for Profit

Even though Black Friday is in a few days, prepping for seasonal sales are still underway with the holiday season coming quickly. Easily discover if your company has a pricing problem, and learn how to fix it by downloading the Pricing for Profit Inspection Guide.

Traditions turned financial fluctuations

Strategic CFO Lab Member Extra

Access your Strategic Pricing Model Execution Plan in SCFO Lab. The step-by-step plan to set your prices to maximize profits.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

Traditions turned financial fluctuations

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If It’s Always On Sale, Is It Ever On Sale?

When you walk into a shopping mall, what do you see? I see sale signs everywhere! How could a company ever make money if its products or services are always on sale? 50% off, buy 1 get 1 free, 70%… It never ends.always on sale

Have you wondered if it’s always on sale, is it ever on sale?

Marketing in Action

Organizations such as Checkbook.org compare the regular price, lowest sales prices, etc. to the public. This non-profit organization has studied companies (especially in retail) to shed light to how those businesses are always advertising sales.

Truth is, we’re all suckers for a good sale. The way marketing works is that they tap into expressing a higher value for a product for a cheaper price. AND it works! If you see a shirt that’s on sale for $15, having been marked down from $45, you’d probably think that’s a great deal. You’re a winner. But what if I told you that that shirt, priced at $45, was produced at $5? At that cost, you’re looking at a 200% profit margin for one T-shirt on sale. And you’re going to buy it because you didn’t have to spend $45. They made you feel that you’re getting a valuable deal. And the next day, this particular store takes 10% more off, giving you an 80% sale.

If It’s Always On Sale, Is It Ever On Sale?

Now, this example might be a bit extreme. But if something is always on sale, is it ever on sale? This type of selling has been known to be very profitable and effective. Consumers believe that they are getting a good deal on a product or service if the percentage off is high (20-80%).

Bucking the Trend

One company decided not to be “always on sale“… with disastrous results. After the 2008 recession, JC Penney’s new CEO, Ron Johnson, made some radical changes in how the company was going to move forward. The company was struggling to find its identity in the competitive world of middle market retail.  Johnson decided that rather than their usual practice of offering an item for $100 only to mark it down to $50 a few weeks later, the store would offer no discounts but would price all its items at what it called “Fair and Square Everyday Pricing”.  The everyday low prices strategy offered the product for less than the initial $100 offer, but slightly more than the $50 sale price.

The problem?  JC Penney’s customers had grown accustomed to discounts and sales prices and went elsewhere when none were offered.  The store’s efforts to attract new customers with it’s simpler pricing policy were a failure as well resulting in decreased sales to the tune of $1 billion.

Want to learn how to price for profit while still catering to your customer’s needs? Click here to download our free Pricing for Profit Inspection Guide!

Pricing could be seen as a form of psychology. People are willing to spend up to a certain point on a product. Johnson failed to see the psychology behind pricing and completely disregarded his customers.

Know Your Customer

This is Marketing 101. Know who your target customer is. What’s the easiest route to obtain and hold on to that customer? Look at marketing’s 5 C’s: customers, company, competitors, collaborators, and context.

  • Are you addressing your customers’ needs?
  • What are the limits of what your company can do to fulfill a customer’s needs?
  • What are your competitors doing?
  • Is there a business that through collaboration could reduce your cost of goods and overhead?
  • What’s going on in the world that’s impacting your business?

JC Penney wasn’t addressing its customers’ needs; therefore, the company lost much of its customer base. The company was also implementing new products and services within the store. Because they didn’t have the capital to execute, JC Penney had to seek additional capital to implement the plan. Competitors  were selling at a lower cost with higher quality material. JC Penney’s customers began flooding to those competitors.

Shipping through Amazon, hiring temporary staff, and so many other strategies could have been implemented through collaboration with another company. JC Penney was implementing a completely new business strategy after the 2008 recession when consumers couldn’t really afford to spend a lot on new clothes.

Target Your Customer

This is your playing field. Focus only on this customer base. Your marketing department is most likely enthusiastic to reach every type of customer through one product. It’s better if you sell to 90% of 100 people than 30% of 300. Why? If you’re only focused on that niche market, then those customers are going to be more loyal to a company that is solely focused on their needs.

Whole Foods and Walmart do an excellent job of targeting their customer. Whole Foods caters to the middle to upper class that desire healthy, organic foods. Their target customer is willing to pay a premium price in order to get a quality product. Whole Foods doesn’t try to target Walmart’s target customer. Walmart caters to low to middle income people who aren’t particularly concerned with the quality of a product, but are looking for the best price. If Walmart were to start selling premium products for a Whole Foods price, Walmart’s customer might be hesitant to continue shopping there for fear that all prices might increase.

If you’re like JC Penney targeting middle-class families, your prices should match what your target customer would be willing to pay for a product or service. JC Penney failed to target their customer because they were only looking at their bottom line.

Price for Profit

If your company is constantly having a sale, are you actually making a profit? It is imperative that you examine your results to monitor if these sales are working and how they are impacting your bottom line.

You should be able to price at a point where you would be profitable. Oftentimes, we analyze the revenue, the big flashy sale signs, and how well the sale is doing. But what if you hosted a sale that didn’t allow for you to make a profit?

Looking for how to price for profit?  Click here to download our free Pricing for Profit Inspection Guide!

Regardless of whether your company is hosting a 20% off, a BOGO, or an 80% off sale, you can still price your products to give you the return you need. JC Penney did a number of things wrong in addition to missing their target customer, but in the end it led to the firing of the CEO and a lengthy recovery period that some still say they aren’t quite through. They didn’t price for their target customer or price at a point that would return a profit.

To make sure that you’re setting your prices at a profitable level, check out our Pricing for Profit Inspection Guide here.

always on sale

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