We should lament the passing of the Yellow Pages. Two decades ago, they were the only show in town and every small business had advertising in them. Every home had a copy. Every manager’s desk was within reach of a copy. Once a year, you spent 60 minutes deciding on the budget and the look of the advertising for the next entire year. Then you forgot about it and let the Yellow Pages do the work.
It is less simple now. There are SO.. many avenues of advertising to your customer base. My marketing colleagues tell me you need to make contact 7 times, using as many types of contact as possible. And there are many possible points of contact; from LinkedIn, Facebook and instagram, to email blasts, newsletters, flyers, radio and TV.
But in the choice lies the problem for many small businesses. The choice requires that small business owners now find the time each week to devote to advertising and marketing. And we all know what happens when you get busy, right?
When a small business is finding it slow, the marketing taps get turned on – FULL. When they get busy the taps are quickly shut off. And the result is that sales rocket and then collapse - rocket and collapse. And the impact of this cataclysmic cycle is that profits suffer. At the bottom of the cycle, we drop prices to get work in the door. At the top of the cycle, we never increase prices to recoup lost profit.
But what would happen if the marketing taps were ON, full time? Well, sales would increase. And at the top of the cycle the order books would be full. And when the workload becomes overwhelming and the orders are coming in thick and fast, what to do? We could hire more people, buy more resources. Or you could simply increase prices and make a lot more money.
So the question is: is it profitable to hire a permanent, if part time, marketing person to keep your company always in the face of your potential customers. Is there any choice?
Want to know more about how small businesses can cope with the social media octopus? Check out “5 Reasons Social Media is Easier For Small Business” from Frithjof Petscheleit http://tweet4ok.com/5-reasons-social-media-easier-small-business/.
Imagine a business, if you would, that shows decent margins, low debt, and slowly growing sales. Bankers examine the financial statements declare that the company is in good shape. “Carry on and keep up the good work,” they say.
But the company is suffering, getting later with supplier payments and struggling to make the payroll.
In my consulting practice, I have found that an emphasis solely on financial statements is misplaced. In the majority of enterprises, financial statements are forensic in nature, arriving well after the damage is done and looking entirely in the rear view mirror.
A cash flow analysis using a cash flow template is an indispensable tool to operate a business profitably. It can easily be done on paper, a white board on in a spreadsheet program.
The principle of cash flow analysis is simple to understand. How much is in the bank today begins the calculation. Add to that balance, the amount of cash inflow from cash payments and accounts paid. Subtract what must be paid to suppliers, rent and employees, et.al.. The net result is the ending amount in the bank. That ending balance becomes the starting balance for the next cycle.
What is important is that we now know when expenses can be paid without bouncing a cheque. We can estimate the cash coming in this week. We know what must be paid. We know when a bill can be paid. If this week is cash poor, we can delay a payment. Or better, we can do something to accelerate a cheque coming in or make that sale that will help so much.
The result is that cash flow analysis can help us to predict and control the company’s future. Try that with a profit and loss statement!
I have just read an article from November of 2013 (Managing Partner, published in New Zealand) about pricing for professionals. When surveyed about how they charge, most professionals shrug and admit that they charge what everyone else charges. It has reminded me to put value and choice at the very top of the list of how to devise winning pricing strategy that will increase profits.
Pricing professional services is a big problem for lawyers, accountants and anyone selling services. Professionals deal in results, but they charge for effort. The easy route is to charge by the hour but that makes it easy for a potential client to compare apples to apples. AB charges $125 per hour. BC charges $250 per hour. Therefore, AB is the best buy. But is that true?
So, would you buy a house based solely on price? House F is small, rundown, needs a roof and is in the middle of a rough neighborhood. It is listed for $229,000. House G is much larger and in a nice neighbourhood. It is occupancy ready and most importantly, your wife likes it. But its list price is $400,000. Which house has value?
In order to place value on a service for hire, the trick is to comprehend that the customer does not care about the amount of time, effort and sweat you expend. They want results. And what is the result they want? Do you ever ask? Where will the customer place the most value? Speed of service? Accuracy? No jail time? Or will they respect the weekends you spent on their file, the late nights and the cost of years of schooling?
So we establish, state and then highlight the value on the table, first, right? But now what?
In order to get your price, though, you must offer choice. Like Goldilocks, the choices must be few - not too high, not too low and just right. Choice in pricing will allow you to take clients and customers with all kinds of budgets and thickness of wallet, without discounting. The platinum package will have the largest assortment of bells and whistles. The gold package has fewer bells and only one whistle but has a lower price tag. The workmanship is still present, but the results are fewer. The bronze package is the budget offering with the lowest price and the fewest bells and no whistles at all.
Want to be more profitable? Be brave and get a better pricing strategy.
Get your calculator warmed up. Business is a game of numbers.
CASH FLOW AND PRICING – how to improve your bottom line with a few key strokes.
Most business owners focus on price and margins forgetting an important element in running a successful business – cash flow. What does this mean and how does it work?
Let us consider for a moment that you are selling loose tea. You pay 1 dollar per kilo for the tea. You sell the tea for $1.50 per kilo giving you a margin of 33%. Monthly you can sell 100 kilos to 100 different customers. So every time you sell one kilo of tea you profit by 50 cents.
At $1.50 per kilo you can sell 100 kilos per month but experiments have shown that by dropping the price to $1.29 per kilo you sell 150 kilos per month to 150 different customers. That generates a margin of 22%. So every time you sell one kilo of tea you profit by 29 cents.
These are the typical areas of focus for business owners. But will they help your profits?
In the first example the cash flow is $50 per month. In the second the cash flow is $43.50. So dropping the price and selling even more tea has damaged the bottom line. In terms of cash flow, increasing the sales has not been a good decision.
But if you focus on the cash flow figure, you can also improve profits, as follows. Suppose that you are now selling tea for the sale price of $1.29 per kilo. But instead of selling one kilo at a time, now the buyer must buy a minimum of 2 kilos. As before 150 customers come in and buy tea and the margin remains the same at 29 cents per kilo. But this time the contribution to the bottom line is $87. And you did not have to work any harder for that profit.
What this example tells us, is to focus on the dollar contribution and not margins or even the price. Dollars pay the rent, employees and taxes.
This technique I have used in bakeries, hardware stores and even truck repair facilities. We focused on the dollars per invoice, assuming that the amount of effort and cost to write one invoice for $5 was the same as for $500. By finding the means to up-sell or add additional lines to an invoice or sales slip, we increased the cash flow. By not adding to indirect costs, and taking into account only the direct cost of materials or ingredients or direct labour, the extra money free falls all the way to the bottom line.
Read more Build your Business articles
- The choice in getting your price Dec 20
- Borrow money & turn around business Dec 6
- Five keys to profitability: Part 5 Nov 22
- Five keys to profitability: Part 4 Nov 8
- Five keys to profitability: Part 3 Oct 25
- Five keys to profitability: Part 2 Oct 11
- Five keys to profitability: Part 1 Sep 27
- Push and pull marketing Sep 13
- Baby boomers, business & Freedom 85 Aug 30
- The bailiffs are coming! Jun 7
- The most brilliant marketing strategy May 24
- Stubbornly operating a losing business May 10
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