5 things you can do to improve your profitability

1. Have a pricing strategy. It is surprising how many companies don’t have a proper pricing strategy and handle it in a very ad hoc way. Have a look at the article posted on December 9th 2006 called ‘Three Ways of Pricing’. This expands on a) cost plus – the least profitable way in my opinion, b) competitive – important to know where you’re pitched and c) value – where you price up your whole proposition and optimise your profit.

2. Promote added value. If you operate in an environment where you must promote to keep customers interested and this is generally in a repeat B2B market, then use value added rather than discount. Use BOGOF (buy one, get one free) deals if you can get or afford them; these are really strong and don’t affect your normal shelf or list price. Supermarkets do it all the time to good effect. Buy 2 get 1 free works as well, as does extra fill products – “20% extra free” means just that i.e. selling 600 ml for the price of 500 ml and is a much stronger offer than 20% off, not least because you know it’ll be passed on at retail.

3. Keep control of your price list. Never, ever panic! You can’t win every sale - the laws of economics won’t let you. A knee-jerk reaction to lower price because of a competitors activity won’t get you any extra sales over the medium term, but it will certainly get you lower profits. Don’t forget, on a 50% margin, if you sell 10 units at £1, you’ll make £5; if you drop 10%, you’ve got to sell 13 units to stand still! Personally, I'd lose the one sale and sell the other 9 at £1. When this happens, sit back, have a cup of coffee and plan your market research – talk to all your customers – you never know, you may be £0.10 cheaper than the competition and be able to make a bit more.

4. Bonus your sales people on cash gross margin. Don’t be tempted to reward on percentage GM, you sales could take a dive. If you do cash GM then your sales people are not just discounting with your money, it’s theirs as well. So, back to the 10 units at £1. You want growth, so you target 11 units at £1 at 50% GM which equals £5.50 cash margin. If you sales people want to discount 10% they’ll have to sell 14 units to hit their target before they get a cent! In reality, the need for heavy discounting will tend to reduce.

5. Watch your business. We’ve been talking about gross margins here, but real profit is after expenses are paid. There are not many ways to influence your net profits: a) sell at a higher price, b) buy, or manufacture at a lower price, c) lower your other non-variable costs. Unless you are Tesco (who’s stated aim is to sell as low as it can, rather than for as much as it can get) you should try to do all of these, all of the time - keep your eye on it constantly.

Have a look at jdsblog.com for another view on pricing - click here

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