How to Succeed in Business: Pricing
Mr. CPA, Tell me what I need to know to be successful in business – make money and stay in business for a long time.
Well, Mr. Client, there are too many subjects for one blog entry to answer your question.
Mr. CPA, Please tell me one important factor I need to know about.
Mr. Client, Let’s start with pricing and your reason for being in business.
Making a profit is very important for you to stay in business. Now you would think this would be obvious but their is a sinister motive that can kill your profit, your business and your quality of life. What is that sinister motive? It is the desire to be the biggest and most popular. The ugly part of this disease is it causes the owners/management to lose site of the real goal. Instead of pursing the most profit (money in your pocket at the end of the day) they pursue being the biggest in their market and it leads to poor pricing decisions and deteriorating margins and ultimately the death of the business and working too hard in the process.
I want to share some thoughts I recall from a seminar I attended years ago. First, is an illustration that highlights the need to focus on profits not size or fame. At the time of that seminar GM had just posted a loss of millions of dollars. The presenter asked us who is the oldest and most profitable automobile company? One hint for you, it was not the biggest which I believe GM was at that time. It was Mercedes Benz. Now ask yourself how does Mercedes Benz market and price its product? Have you been to a sale on Mercedes Benz? GM on the other hand marketed and sold based on sales/discounts. At that time there were no discounters who had been successful for a long time – many years.
Consider that being in business is all about how much money you have in your pocket at the end of the day. The seminar presenter’s young son ran a lemonade business that summer. His son’s net profit was around $30. Your not impressed. Maybe you should be. His son made millions of dollars more than GM that year.
A little while ago I saw an article about the Grateful Dead and their success. You may wonder what success since they were not a band that produced top forty hits. The Grateful Dead was profitable and had a most loyal following for many years. You see you do not need to be the most popular or the biggest in your market (in sales) to be successful. Mercedes Benz does not sell the most cars but they have the most money in their pocket at the end of the day and have been in business longer than any of their competitors. The Grateful Dead were not the most popular band but they were profitable and they stayed in business longer than well over 90% of their market.
So let me see if you understand the concept. If you price your product 20% higher than your competition, Mercedes Benz is much higher than that, how much less in unit sales can you take and make the same profit? As long as you do not lose 20% or more of your customers you make the same or more money and work less. How do you like that formula? You understand if you get that not discounting your price enables you to make the same profit and not work as much. GM and other discounters make more products, work more and harder to make less money. So what do you want to accomplish? Do you want to sell more widgets than anybody else or do you want to be the most profitable and have the most money at the end of the day and a better quality of life?
Years ago I consulted with a lawn care professional about this very subject. He was working too much and not making much money. He was thinking about buying more equipment and adding more employees and discounting his price to attract more clients. Does a lower price accomplish that? I know that is taught in college courses but it is usually taught by a guy wearing sandals. Are you buying that?
OK lets try pizza. You ever buy pizza from Domino’s? Apparently many people do because I see their delivery vehicles every day. Why would you order a pizza from Domino’s? They do offer sales but even when they are on sale their pizzas are not the lowest priced in the market. Their pizza is not even close to being the best quality. So why do you buy their pizza? Because they deliver quickly. Domino’s makes a nice profit but they do not price their product to be the biggest nor are they the most popular. So is pricing your product or service lower than the competition what you want to do? If so you will work too much and not make enough if any money.
I explained to the lawn care professional that he should try on the idea of not adding equipment and employees but rather raise his prices by around 15%. In particular he could identify his clients that are geographically more isolated and raise their prices more to make it more worth his while to drive to their location. If they fire him then his business would become more centralized and require less time. He could lose up to 15% of his clients and work less and make the same money. In all likelihood he would lose a smaller percentage of clients and make more money. In addition good clients value your product or service more if it is not the cheapest in the market. Do you know what stopped him from implementing this strategy? He wanted to have more clients than his competitors more than he wanted to make money and work less. Three years later he still was over worked and not making much money. You see desire to be the biggest will kill your business and your life.
Now here are the “real kickers.” Of your clients, who complain the most and take the most of your time? That is right, the client that wants the biggest discount. Think about your quality of life and how your pricing affects that. Also, what happens when you invest in more equipment and hire more employees because you are going to get more customers when you lower your price? If you were your own competitor what would you do in response? Perhaps you would consider matching the price to keep your own customers? Probably. And then what happens? Everyone makes less money and your customers will complain more, because you are what? Cheap. So your service or product must not be very good.
There is much more to share about pricing but for now I will leave you with something to think about. Perhaps you have heard the expression: “Build a better mousetrap and the world will beat a path to your door”? Wrong. They will only beat down a path to your door if you do not charge enough.
There is more than one way to get to the market. Which way will you choose? What do want to accomplish?
I am happy to share my insight gained from years of experience in my own business and having a prime seat serving many clients over the years to see what works and does not work. I have my own income tax practice and my price is not the lowest and I am not seeking to get the most clients. I have fewer clients who get better service and I make the same or better money in less time. I would be glad to help you as a client if you really want to be successful in making money and having more in your pocket at the end of the day. Call me today using the number below. I am not available 24 hours a day because I value my quality of life but my SOP is to return your call within 24 hours or let you know when I will be available.
Jeff Haywood, CPA
I prepare the following types of tax returns:
Federal and State Returns
I especially enjoy discussions about you, your business, your dreams and goals.
For recent US income tax content see the following links:
Credit for Education Expenses: American Opportunity Credit – Extended Through 2012
How to Prepare Before a Disaster Strikes
IRS: Summer Day Camp Expenses May Qualify for a Tax Credit
IRS Tax Tips for Students Starting a Summer Job
IRS Tax Tips for Deducting Charitable Contributions
Tax Planning Tips
Tax Tips – Tip Income
Are You Ready to Purchase a Home? Factors to Consider.
Foreign Earned Income Exclusion
A Most Valuable Resource for Entrepreneurs
How to Profit From Your CPA
Begin With The End In Mind
If the band you are in starts playing different tunes
Where Is It? Tax Refund
Deadline for 2010 Personal Tax Returns Moved
Now is the time to file those late tax returns for previous years
IRS: 8 Things to Know if You Receive an IRS Notice
IRS: Nine Fact on Filing an Amended Return
IRS: Eight Facts on Penalties
IRS Top Ten: Making Federal Tax Payments
Forming a New Business – Please Consult With Your CPA First
Questions After I Have Filed My Return
For a full list of prior posts see the CPA Tax Blog.
As always keep in mind that the content provided on this site is general in nature and may or may not apply to your particular case. It is best to check with a tax professional about your circumstances and what is best for you personally. Also, IRS regulations and tax laws are constantly changing and the information on this site is not constantly updated. Again please check with me about your particular circumstances and what will be best in your situation at the given time and law.
If you have a comment to share about this post or for me, please email me at email@example.com.
This article was written by Jeff Haywood, CPA.
Jeff is a licensed CPA in both Texas and Illinois.
He has prepared income tax returns for the public for over 10 years.
He also has an MBA in Finance from Loyola University in Chicago and he has 24 years experience in Corporate Finance and Business Analysis.