In a previous post, Avoid Blowing Your Revenue Engine, I described how important calculating your maximum capacity is and how it can help you make better operational decisions. Now I want to show you how to use your price to fix a capacity issue.
First let’s review your maximum capacity (see previous post) determining you have excess capacity. From here you would ask, ”does my current level of sales create a good profit?” A ”good” profit is subjective, but profit margins vary from industry to industry. So, check reports in your industry to determine where you profitability should fall for a company like yours.
Answering the profitability question is critical as it dictates your next action. If the answer is, “yes I am profitable”, then build a sales plan to sell the remaining capacity.
From here you move on to determine what kind of marketing support is required to hit the new sales quota. You can see more about this in the post Building Your Sales Plan Doesn’t Have to be Rocket Science.
Assessing Where the Problem Lies
If you are near operational 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 may be too high. Or second, and a more likely situation, is your price is too low.
Look at the cascading negative effects that occur if you don’t recognize this situation before you make a decision. If you sell more, you quickly exceed your operational capacity. So, you will have to:
- hire more help
- order more materials
- potentially get more equipment and facility space.
This all costs more money, money you don’t currently have because of your poor profitability. If you can’t deliver on these orders, you’ll create a customer service problem, which can quickly turn into a publicity nightmare as word spreads about your inability to deliver.
Using Your Price to Fix Capacity Problems
To fix the problem you need to review 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. Watch this video to get a better idea about when to increase your price.
Can you see why it’s so critical to understand your 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.
Find out how you can fix all these problems by registering for our Tuning Your Revenue Engine Masterclass. Just click the button below to register.
Copyright ©2011, 2009 Dino Eliadis