Expand Profits Through Lower Prices

Anytime 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 growth 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 find 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 instance, 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, look for 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 control over which fiscal years the expenses fall into. There may be more expense 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 a low 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