Avoiding Price Problems That Can Kill Your Business
In a previous post entitled Avoid Blowing Your Revenue Engine I showed you the importance of calculating your maximum capacity and how it can help you make better operational decisions. Maximum Capacity is important to understanding where the sales function should be focused and if your pricing is set properly too.
The first step is to review your maximum capacity (see previous post) determining if excess capacity exists. The question from here is ”does your current level of sales create a good profit?” A ”good” profit is very subjective but profit margins vary from industry to industry so it has to be subjective. Check industry reports to determine where profitability should be for your company.
The answer to the profitability question is critical as it dictates your next action. If the answer is yes you are profitable, build a sales plan to sell the remaining capacity and move on to marketing to determine what kind of marketing support is required to hit the new sales quota. This will be the topic of a future posting.
If you are near capacity and the answer to the profitability question is no, then you have an entirely different problem. One of two different situations may exist. First, your expenses potentially are too high. Or second and a more likely situation is that your pricing is too low.
Look at the cascading negative events that occur if you don’t recognize this situation before you make a decision here. If you sell more you will quickly exceed you capacity. So, you will have to hire more help, order more materials, and potentially get more equipment and facility space. This all costs more money. Money you don’t currently have because of poor profitability. If you can’t deliver on these additional orders you’ll have a customer service problem which in turn could turn into a marketing nightmare as word spreads about your inability to deliver.
To fix the problem you need to focus on your expenses to assure that they are in line. Don’t begin cutting haphazardly (see our previous posting, Are Your Sales Down Because of Poor Decisions Made Months Ago?). If you feel expenses are in line, look to your pricing. Far too many small business improperly price their products and services. Our online training video, “How To Improve Your Price & Profitability“, provides a simple method of properly calculating your prices.
Can you see why it is so critical to understand the key drivers, like maximum capacity, for your business? It tells you when you need to hire more employees and order more equipment and material. It also tells you how much revenue your operation can produce; provides you with the targets for your sales and marketing efforts; and can give you deep insight into your company’s pricing structure.
Share other ways that you have used maximum capacity to help you better manage your business.
If you need help getting started, the Revenue Engine Performance Model provides an excellent general starting point from which all business can begin. From there you can refine your drivers as you learn more about the specific cause and effects of your business. Contact DE, Inc. for more information regarding this powerful tool.
Copyright ©2011, 2009 Dino Eliadis