Your company has a business model and a strategy. If your strategy is to differentiate your offering and create greater value, you no doubt have a higher price than many—or most—of your competitors. That higher price isn’t some arbitrary decision. It’s based on what is required for you to execute and deliver for your clients.
Selling More at a Lower Price
If you are exactly as good as you are now and lowered your prices to match your competitors, you would no doubt sell a lot more than you are selling now. Selling would be much easier once you take price out of the equation.
But here’s the thing: selling more doesn’t make sense. To understand this, you have to understand a Profit & Loss statement.
The top line on the P&L is your Revenue, that’s how much your company billed your clients. After that, you have the Cost of Goods (or Services) Sold and you Operating Costs. Once you subtract those costs from your Revenue, you are left with your Net Profit, or what your company actually made for all the work you did and the outcomes you delivered.
Let’s say your Net Profit is 8 percent of Revenue. To match your competitor’s price, you would have to reduce your prices by 11 percent. Now you are better, and you are dead even on price. That sounds good, because you can massively increase your sales. But that reduction in price across all revenue would leave you with Net Revenue Loss of 3 percent. Congratulations, you broke the model and destroyed the strategy.
Now you have to find a way to be profitable. Welcome to Economic Adulthood!
What Would You Cut?
You know all those things that your company does to be the best in the world in your category? Well, some of that stuff has to go. What’s the most expensive asset on most company’s P&L: people. Some people are going to have to go, and others are going to have to have their compensation restructured so that company can be profitable.
Your new model isn’t designed to support the salaries where they are now, nor will they sustain the rich commission the sales force was paid for being able to convey the value of your offering to the people who are willing to pay more to have something better than “good enough.”
Some People Will Only Pay for Good Enough
Some people will only pay for “good enough.” That says something about them, not about you, your company, your offering, and the price necessary to deliver something better, something exceptional. You never have to apologize or feel that it is wrong for you to have a higher price than your competitors. The price is only higher so you can create greater value.
If you think it is difficult to sell with a higher price, try selling with a lower price, where you are undifferentiated and commoditized.
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Filed under: Business Acumen