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Black Friday

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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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Why You Need a New Pricing Strategy

Larry is operating a lemonade stand, and he thinks that his lemonade is the most valuable drink available. Because he interprets his lemonade as highly valuable, he decides to charge $85 for a glass of lemonade. Larry wonders why no one buys his lemonade. Although he may seem highly profitable when you work out his unit economics, he has not sold a single glass of lemonade. Like Larry, you may need a new pricing strategy.

What is your current pricing strategy? For example, you may be setting the prices on your perceived value of your product/service like Larry. But have you thought about how you could price your products/services better to improve your company’s profitability?

need a new pricing strategy

What is a Pricing Strategy?

To determine if you need a new pricing strategy, you need to identify what pricing strategy you are currently using.

Often, pricing is seen as the marketing and sales department’s role. But as the financial leader’s role morphs into a value adding position, you must work with every department (including marketing/sales) to be able to squeeze profits from every corner of the business.

The Variety of Pricing Strategies

When you are looking for a new pricing strategy, you should assess the different types of pricing strategies and the reasons for picking a one over another. Some of the more common pricing strategies include neutral, penetration, forward, skimming, and value-based. Although there are other strategies that we could dig into, these are among the most popular.

Neutral Pricing Strategy

The first pricing strategy that companies can use is the neutral pricing strategy. As the most common strategy, businesses price their products or services so that their customers are indifferent between a competitor’s product and yours. After taking into account all the features and benefits of the product, the price is set – essentially making you neutral in the pricing game.

While this may seem intelligent, it makes it difficult to expand your customer base as they have no real reason to choose your product over another of the same price. There is no value expressed in the neutral pricing strategy – thus, limiting the profit capabilities.

If you want to gain more profit margin, neutral pricing strategy is a safe (and ). To price your product or service correctly, download our Pricing for Profit Inspection Guide whitepaper!

Penetration Pricing Strategy

If you want to be more aggressive than the neutral pricing strategy, you may want to choose the penetration pricing strategy. This strategy is used to gain market share, but it has several drawbacks. For example, price wars can start between competitors. Because you don’t want to lose your market share, you may be tempted to lower your prices. But your competitors will likely lower their prices as well to compete for their customers. If you continue to lower your prices, your margin will be squeezed until you are unprofitable.

Grocery stores most commonly use the penetration pricing strategy. Most recently, Amazon acquired Whole Foods (a traditionally expensive grocery store chain) to compete with other grocery stores such as Walmart, Target, Kroger, and other local stores. As Whole Foods slashes their prices, stock prices in major grocery stores have declined in anticipation of them having to reduce their prices to compete. It’s too soon to see the result of implementing a penetration pricing strategy; but unless these stores gain more customers or offer other profitable products, they will become less profitable.

Forward Pricing Strategy

Like the penetration pricing strategy, a forward pricing strategy focuses on the future costs associated with that product or service. Companies are willing to price below cost of goods sold at first if they know that in the future, they will have higher margins. If a company cannot predict that if they sell X units by Y date, then having a forward pricing strategy may not be the best strategy for your business.

If you need a new pricing strategy, you need to think about pricing for profit. Download our Pricing for Profit Inspection Guide to learn if you have a pricing problem and how to fix it.

Skimming Pricing Strategy

Converse to the penetration pricing strategy, skimming pricing strategy allows companies to segment the market to gain access to those customers who are willing to spend more per unit. Most commonly, a company utilizes skimming at two different periods in the product life cycle, the beginning and the end of the product’s life.

Apple’s Skimming Pricing Strategy

For example, businesses that are in a semi-monopolistic positions use the skimming pricing strategy when launching the product. Think of the iPhone. Apple set their prices for the iPhone high as they were only wanting to sell to those customers with the willingness and ability to pay. As that small market depletes or slows down, Apple reduces their prices to sell to the next tier and then the next. Recently, Apple released the next generation of iPhones – iPhone 8 and iPhone X. If you’re looking to access the iPhone 8 with 256GB, expect to pay $849. You can get the iPhone X for $1,149 with the same storage as the iPhone 8.

If you look at the prices of each of their products, expect to pay 2-3 times as much for a similar product compared to other competitors. So how are they so successful? Apple has created a culture in which people are willing to spend a large amount to remain in the Apple community. Unfortunately, not every company will be able to replicate Apple’s pricing strategy. But it’s important for you as a financial leader to study what other brands are doing in regard to pricing.

Value-Based Pricing

Ask yourself this question: How much is your customer willing to pay for your product or service? There is a price that your customer is willing to pay for something without having any knowledge to how much it costs to produce or anything else. Value-based pricing is the next pricing strategy. While implementing this strategy is not simple, you can potentially gain more profit than using any other pricing strategy available.

In business school, students are taught to use the cost-plus method. Instead of adding value with their product, business leaders simple decide on the margin that they would like to have. There’s no real thought process in cost-plus pricing, but it is an easy way to bypass your customer and be in sync with your competitors.

For example, Apple has created a value for its products. They didn’t decide on a margin, but instead established such a perceived value that people cannot wait to get their hands on the next product. Some have converted all their technology over to Apple because of that added value. It’s not going to be the cheapest technology on the market and may not even be the best. But the customer is willing to pay for it at the price Apple has set. According to CNN, Apple is worth $750 Billion so they are doing something right!

need a new pricing strategyWhy You Need a New Pricing Strategy

Unfortunately, your company may be pricing your products or services too low (or too high). And your customers are not buying. You may need a new pricing strategy. Ask yourself some of the following questions:

  • When did you last interview your customers about your pricing?
  • When did you review your pricing strategy last?
  • Have you ever tested your pricing on different groups?
  • Which markets have you not be able to get into yet?

Pricing is the basis of your business and is the most important factor in profitability. If your company is solely relying on something other than pricing to improve profitability, you may need to assess why.

Buttress The Business

As you decide if you need a new pricing strategy, assess whether your pricing is a buttress of the business. We can agree on the fact that businesses exist to provide real value. Your business should be structured to support and validate the reason for the price per unit (and the value provided). McKinsey & Company highlights that most businesses do not pay enough attention to their pricing!

Most businesses fail to test customer value perceptions and price sensitivity after products launch and have no idea how the critical trade-off between price and volume shifts over time. Second, companies must make pricing decisions in the context of their broader product portfolios because when they have multiple generations of a product in a market, a price move for one can have important implications for others.

Increase Profitability

Price Intelligently references to a “landmark study [that] was published in a 1992 Harvard Business Review by Michael Marn and Robert Rosiello, both senior pricing folks at McKinsey and Company. The dynamic pricing duo studied the unit economics of 2,463 companies and found that a 1% price improvement results in an 11.1% increase in operating profit, which compares to 1% improvements in variable cost, volume, and fixed cost only resulting in profit increases of 7.8%, 3.3%, and 2.3% (respectively)” Having a value-based pricing strategy will improve your profitability. If you are looking to drive more profits this next quarter, you need a new pricing strategy. To learn how to price for profit, download our Pricing for Profit Inspection Guide.

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Why do most startups fail?

why most startups fail

Right now is the time of innovation – kickstarters and new types of marketing campaigns are popping up everywhere. You might have an idea yourself, regardless of whether you’re a Millennial, Generation X, or even a Baby Boomer! So how do you know if your idea is a good one?

As I have mentioned in previous posts, I am an adjunct professor at the University of Houston Wolff Center for Entrepreneurship. In one of our first classes, we discussed an interesting topic: the survival rate of a new business, and why most startups fail.

According to Fortune, 9 out of 10 new businesses fail. The number one reason for why most startups fail was not having a product that serves the market. I asked the students this question, and now I’ll ask you… Do you think a good product is enough to survive in the market?

Top 5 Reasons Why Most Startups Fail

The answer to that question is no. A number of factors play into why most startups fail. Here are a few:

#1: People don’t need it!

The number one reason for the failure of a business is creating a product for a market that doesn’t need it. The first thing you should do, before you spend all of your cash on producing and prototyping your product, is market research. Who is your customer? How many customers are out there? How much are they spending on a product that serves a similar function? If you can’t answer all of these questions about your idea immediately, then maybe this isn’t the best business to invest in.

 #2: Cash wasn’t King

Where are you spending your money? Research shows that 29% unfunded startups fail because they ran out of money. We can assume that they spent the money on research and development, marketing, salaries, and other overhead expenses. How did they run out of cash in the first place? Because the financial leaders overlooked important, and possibly tedious details.

Also consider that different businesses see profits at different times. You may go 5 years without seeing a dime. Or maybe it’s the other way around –  some startups might skyrocket after a couple of years. But do they have enough cash to keep them afloat? Looking ahead is always important when you manage your finances. Like gas in a jet, cash is the fuel to keep your business running. Cash is king.

Even if you aren’t starting a new business, taking a look at your company as a whole is always a good idea when making big decisions. Download our free Internal Analysis whitepaper to learn how!

#3: Lack of a Quality Team

why most startups failObviously when you start a company, you want the best staff you can build. However, most startups can’t afford “the best of the best.” There may be certain skills that you need, tasks that need to be done quickly, but your staff simply cannot keep up.

Let’s say your team has all the skills you need, but they don’t communicate or work well with others. You’ve just invested your money in a team that could fall apart. It’s better to a have a team that learns the skills and has a positive attitude, versus a skillful team with a negative attitude. In this case, quality is defined by the talent in the person, not just the skills they bring.

#4: No Competitive Advantage

On top of marketing research, you also have to conduct competitive research when you start a business. What makes your company unique? In a way, a condensed competitive scope may indicate that your product is needed. What you have to figure out is how to make your brand more attractive than your competitor’s.

This means more than just “being the cheaper alternative.” The intellectual property itself has to have that secret sauce… which also means that you answer your customer’s problem better than your competition.

#5: Poor Pricing

Poor pricing is another reason why most startups fail, so don’t underestimate the power of smart pricing.

The Startup Roadmap

Solve a Problem > Build a Good Team > Research/Develop the Idea >

Financial Projections > Look for Funding > Develop Product >

Disrupt a market.

This is a general roadmap of a startup. Typically, it takes 3 years to be successful in an industry. Think about it – when you apply for a job, they look for people with 3+ years experience. Why? Because they have 3+ years experience in a skill set. The interviewee knows how to navigate a problem and has practiced solving it. Same goes for a business.

Why Banks Turn Startups Away

The research pwhy most startups failreviously mentioned shows data for companies that have been around 3-5 years. I like to think that after you pass the first three years, things get easier for your company. For example, banks need to see at least 3 years of financial statements. You may not need profits for all three years, but you should be trending upward by year three for banks to consider investing in your business.

Banks turn away companies less than three years old for multiple reasons. One is that new or small businesses are more risky than larger businesses. Post-recession, banks have to be more strict with who they lend to. Banks also earn less profit on smaller loans. If you think about it, banks underwrite a $5 million loan for the same cost of underwriting a $50,000 loan. It makes more sense to focus on the larger loans, with a less risky business.

Conclusion

Although it seems like everyone around you is looking for that next big idea, really think through your next venture. Do you have a market, cash, and a good team? What is your competition like? And finally, what is your pricing strategy? If you create a roadmap and make financially sound decisions, your startup should already look better than most.

Speaking of making financially sound decisions, check out our free Internal Analysis whitepaper to assist your leadership decisions and create the roadmap for your company’s success!

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Should You Use Margin or Markup Percentage for Pricing?

The biggest struggle in maintaining or improving profitability often comes down to pricing.  Two of the most common methods companies use to price their products are margin and markup.  Unfortunately, many people think they’re pricing their products based upon a desired margin, but they’re really using markup.  There is a major difference between the two methods and their impact on your bottom line.

markup percentageThe Problem With Markup

Markup is commonly used to find the price of retail products which are somewhat of a commodity; costs are fixed and the market dictates purchasing price. Let’s explore what happens when you use markup as your primary reference for pricing.

Calculating Markup Percentage

Markup Percentage is the percentage difference between the actual cost and the selling price.

The formula for markup = selling price – cost. 

The formula for markup percentage = markup amount/cost.

Let’s say I owned a t-shirt company, and the unit cost of a t-shirt is $8. I want to sell it for $12. The retail markup would then be $4 because:

Retail markup = selling price – cost = $12 – $8 = $4.

The retail markup percentage is 50%, because

$4/$8 = .50

How Using Markup Can Hurt Your Business in the Long Run

Markup is the difference between the actual cost and the selling price.  Since it is generally market-driven, it often fails to take into account a lot of the indirect costs associated with the product. Setting prices in terms of a particular markup can be dangerous unless the markup has been calculated in a way to consider all product costs – direct and indirect.

Are your sales suffering because of pricing issues?  Check out our Pricing for Profit Inspection Guide to improve your pricing strategies.

Gross Margin Percentage

With our clients, we recommend using gross margin (or profit) percentage for a number of reasons. It is more reliable and accurate, and we can easily see the impact on the bottom line.

Calculating Margin

As mentioned before, gross margin is:

Sales – Cost of Goods Sold (COGS). 

We then find the gross margin percentage, which is:

(Gross Margin/Sales Price) X 100.

Based on these calculations, how do we determine the selling price given a desired gross margin? It’s all in the inverse (of the gross margin formula, that is). By simply dividing the cost of the product or service by the inverse of the gross margin equation, you will arrive at the selling price needed to achieve the desired gross margin percentage.

Margin Percentage Example

For example, Steve charges a 20% markup on all projects for his computer and software company which specializes in office setup. Steve has just taken a job with a company that wants to set up a large office space. The total cost needed to set up the space with computer and the respective software is $18,000. With a markup of 20% the selling price will be $21,600 (see how to calculate markup above). The margin percentage can be calculated as follows:

Margin Percentage = (21,600 – 18,000)/21,600 = 16.67%

Margin vs Markup

As you can see from the above example, a 20% markup will not yield a 20% marginFailing to understand the difference between the financial impact of using margin vs. markup to set prices can lead to serious financial consequences.  In the example above, if Steve were to assume his 20% markup would yield a 20% margin, his net income would actually be 3.3% less than expected. While a 3.3% difference in net income may not seem like much, to many low-profit-margin businesses it can mean the difference between solvency or bankruptcy.

Additionally, using margin to set your prices makes it easier to predict profitability.  Using markup, you cannot target the bottom line effectively because it does not include all the costs associated with making that product.

How to Minimize Margin vs Markup Mistakes

Margin vs Markup Chart

15% Markup = 13.0% Gross Profit
20% Markup = 16.7% Gross Profit
25% Markup = 20.0% Gross Profit
30% Markup = 23.0% Gross Profit
33.3% Markup = 25.0% Gross Profit
40% Markup = 28.6% Gross Profit
43% Markup = 30.0% Gross Profit
50% Markup = 33.0% Gross Profit
75% Markup = 42.9% Gross Profit
100% Markup = 50.0% Gross Profit

Conclusion

To sum things up,  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. Markup is not as effective as gross margin when it comes to pricing your product.  Not only should you take into account how much it costs to acquire the product, but you also need to take into account the indirect costs associated with your product in order to ensure you’re selling your products at a price that will result in profit.

If you’re still uncertain about how to price your product or service to be profitable, download the free Pricing For Profit Inspection Guide. This ultimate guide allows you to easily discover whether you have a pricing problem and gives you steps to fix it.

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The Electronic Red Pen – Strategic Pricing Techniques

 

Whenever you go shopping, does it seem like there’s always a sale going on?  It’s as if marketers believe that by offering a high value item for a lower price, it becomes a more attractive item to purchase. I have a term for this – the electronic red pen.

strategic pricing

What the heck is an “electronic red pen”?  Well, it all started 35 years ago…

My mother told me before I got married that when I go shopping that I should “always carry cash and a red pen.”

My mother has always had fascination with clothes, but my father didn’t understand why she would spend so much on clothing. To avoid upsetting him, she decided to carry cash and a red pen whenever she shopped.

Let’s say she came across a dress she liked (never mind the fact that she just bought one last week). She would pay for it half in cash and half in credit. Then, she would take out her red pen and mark through the tag price, adjusting the price to 50% off.   This was an easy way to convince my dad every time she shopped that she had found a good deal. What was once a $100 dress was now a $50 dress and my mother looked like a savvy bargain hunter.

Which begs the question…

If it’s always on sale, is it ever truly on sale?

Have you ever walked into a department store that constantly has a sale? You were in there two weeks ago, and they had a 70% off sale for a “limited time only.” Believe it or not, this electronic red pen strategy happens a lot! Consumers are constantly sucked in from company pricing strategies.

So if it’s always on sale, is it ever on sale? As financial leaders, we’re faced with this predicament with consumers being so trained to fall for this technique as well as the emergence of consumers realizing that this is just a marketing plea for business.

The Electronic Red Pen

strategic pricingThe Electronic Red Pen is a strategic pricing theory that I define as “a large amount of value for a small amount of dollars.”  For example, we sell the Strategic Pricing Model tool at only $59. A company can benefit from this tool by considering all costs before they settle on a price, improving communication with the sales team, and increasing financial performance. This value, from a financial standpoint, is worth much more to a company than just $59.

So why do we sell such a high-value tool for only $59?  While the consumer is getting a great value for just a few bucks, we’ve made sure that our target price will still yield a profit.

To effectively use the Electronic Red Pen strategic pricing theory, you must first price your product or service to result in a profit. (For an easy way to get started, check out our free Pricing for Profit Inspection Guide.)

On the other hand, some companies choose to not use the Electronic Red Pen…

The Anti-Electronic Red Pen

Some businesses adopt an “anti electronic red pen” pricing strategy.  Often seen with the pricing of luxury items, perceived value is the focus rather than a “bargain basement” mentality.

The anti-electronic red pen pricing strategy creates a feeling of exclusivity, a barrier-to-entry which intimates that the product is only meant for the select few who can afford it. For example, a BMW vehicle or a diamond is priced at what it’s perceived to be worth.  Owning one of these exclusive items makes the consumer feel as though they’ve achieved a certain level of wealth and demonstrates to others that they can afford such luxuries…  which is value in and of itself.

Example of Apple

21upJE9hHjL._AC_UL320_SR278,320_If I were to take a guess, about 50% of those reading this post have an iPhone. Apple has pioneered the cell phone industry, with Windows and Android following closely behind. This company avoids the strategic pricing theory of the electronic red pen as if it were the plague.

By utilizing the anti-electronic red pen strategic pricing theory, Apple has created a a level of prestige that people aspire to be a part of.  They do this by having the capability to manufacture an iPhone for roughly $200 (we’re just guesstimating that for now), yet they put a dollar value on the phone of around $800!!! That’s a $600 or 75% margin per individual phone.

How do they get away with it? Apple has created that perceived value… And people buy it.

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

Unless you have a brand that can demand a high dollar amount for a high perceived value, you might be in a better position to utilize the electronic red pen strategic pricing theory. Here are 3 ways to start implementing the electronic red pen in your business

3 Ways to Implement the Electronic Red Pen with Strategic Pricing Techniques

#1 Bracketing

strategic pricingThe number one way to implement the electronic red pen is to simply communicate that the product/service has a higher value than its price. The value of a product may be $1000 but is being offered $750. Be sure that when you are bracketing, you are still creating value for yourself.  Don’t just focus on sales…  make sure that you’re using your electronic red pen wisely to return a profit.

If you’re not sure where to start, download our Pricing for Profit Inspection Guide.

#2 Psychology

We all love to find things on sale.  We want to know that we are getting a good deal!  My mother overcame my father’s objections about her spending by showing him what a bargain hunter she was.

Evaluate how your market is psychologically moved from a potential customer to a sale. Utilize those tactics as you implement the electronic red pen pricing theory.

#3 Urgency

It may not always be on sale. This marketing tactic has been proven time and time again. Do you find emails in your inbox for webinars with limited space or sales that are only happening on Labor Day?  You may not be one to take the bait, but someone out there is bound to get reeled in.

This goes back to communicating that there is a value, but this time, it’s is crucial to communicate the urgency of the sale. Try to include tags like “Limited Time,” “Sale is Closing Soon,” or “Annual Sale.”

I can’t stress enough the importance of strategically pricing your product or service. You can only cut so much below the line before you cut out the floor below your feet.

For more tips on implementing the electronic red pen strategic pricing theory, check out our Pricing for Profit Inspection Guide here.

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Margin Compression

money in a viseEver heard the term “margin compression”?  Put simply, margin compression occurs when the costs to make a product or deliver a service rise faster than the sales price of the product or service.  Hence, putting pressure on profit margins.

Causes of Margin Compression

There may be many causes of margin compression…

Increased Competition

When I started The Strategic CFO over 16 years ago, I remember how hard it was to sell the idea of a part-time CFO.  Nobody was doing it, so it was tough to convince people that there was a need.

These days, there are so many new companies providing interim CFO services that trade show sponsors struggle to separate our booths in the exhibit hall.

As you might expect, the influx of new firms offering the same services as SCFO put pressure on our margins.  One of the ways that we have responded is by developing alternative income streams.  As a result, we now offer additional services complementary to consulting that aren’t yet so competitive.

 Internal Production Problems

Sometimes, a business can put pressure on itself.  Internal problems such as not using resources wisely can cause a business to incur more costs than necessary.

Resource waste may take the form of labor or material cost overruns due to poor planning, out-of-date processes or equipment, poor systems design, etc.  Regardless of the source, it’s important for businesses to monitor and improve key drivers in order to ensure that all resources are as productive as possible.

Macroeconomic Factors

Unless you’ve been living under a rock, you’re probably aware that low oil prices are wreaking havoc on much of the energy industry, as well as many tertiary industries.  While it may seem like there’s little a business can do to deal with such macroeconomic factors, there’s still hope.

Even though it’s tempting to be reactionary in the face of crisis, focusing on the long-term goals of the company rather than the short-term obstacles is critical.  Yes, you should closely examine costs and cut those that aren’t mission-critical.  It’s important to realize, however, that the crisis will end and you must still have the necessary resources to take advantage of the recovery.  The best antidote for these “black swans” is to plan for the crisis before it’s upon you.

SG&A Costs Out of Whack With Pricing

How do you price your products or services?  Some companies apply a markup to their direct costs.  Others set their prices to achieve a desired margin.  Very few, however, take their pricing down to the net income level.

While it may seem heavy-handed, examining all costs that go into making a product or delivering a service is necessary.  Otherwise, it’s easy to ignore creeping SG&A costs and their impact on profitability.  To guarantee that you’re pricing for profit, make sure that your pricing model takes into account SG&A costs.

Think you might have a pricing problem?  Download our free Pricing for Profit Inspection Guide here.

Margin compression

Margin compressionRegardless of what is causing your margin compression, there is a solution.  Diversification, improving productivity, planning for lean times and pricing for profit are just a few ways to deal with the problem.

How have you dealt with margin pressure?  Leave us a comment below with you thoughts.

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Breakeven Analysis

breakeven analysisAccording to Webster’s Dictionary, the breakeven point is defined as “the point at which cost and income are equal and there is neither profit nor loss“.  The purpose of breakeven analysis is to determine the point at which revenue received equals the costs associated with receiving the revenue.  Simply put, how much revenue we need to earn to cover our costs.

Breakeven Analysis

Situations that call for a breakeven analysis can include:

Start-Ups and New Ventures

The most common use of breakeven analysis is when considering starting a new business or whether to develop a new product or service.  The limitation of breakeven analysis for a new venture is that it doesn’t take into account how demand may be affected at different price levels.

Breakeven Analysis in Pricing

As outlined above, most companies perform a breakeven analysis in pricing when rolling out a new product or service.  However, it’s important to periodically revisit the analysis to determine whether conditions have changed.  For example, if demand for a product has increased, then it may be possible to reach the breakeven point sooner if the price of the product is increased.

In Times of Trouble…

When business is booming, it’s easy to lose control of costs. This is because the volume of sales is more than enough to cover them.  When things start to head south, revisit your breakeven analysis to ensure that prices are set correctly. Only direct resources towards profitable sales.  Calculating the breakeven point by product, customer, or region can help highlight areas where you can make improvements.  Often, it’s possible to convert some fixed costs to variable costs in order to keep costs in line with volume.

To learn how to prepare a breakeven analysis, check out this article on wikicfo. If you also want to learn how to price for profit, then download our Pricing for Profit Inspection Guide.

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breakeven analysis, breakeven analysis in pricing

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