The “Pricing” Component of a Successful Business
At the center of the business operating system model I’ve developed is my Five Ps of Business Success philosophy. These five components – People, Product, Process, Pricing, and Planning – not all of which are financial, are integral to both strategic planning and day-to-day operations, and impact profitability.
Achieving profitability is highly dependent on pricing. You’ve determined what to sell and how to sell it. But often, business leaders don’t put in the time to determine the right pricing structure. Pricing is the most vital component for making money and is central to your company’s strategy to increase profitability.
It’s erroneous to assume you can base your pricing on what competitors charge, your gut instinct, or even on your costs to produce and provide your product or service. Your objective is pricing well such that your price tag reflects what the market will bear, yet motivates buyers to choose your product over the competition while retaining the perceived quality and value of your brand. To find that sweet spot, pricing decisions must be based on quantifiable data and a good understanding of where you are and where your sights are set in terms of profitability.
As you’re developing your pricing model, consider the following questions.
- What profit level do you want to achieve?
- Is your product priced to be profitable?
- Have you developed a formula to achieve your gross profit?
- Do you know your costs?
- What products yield the highest gross profit?
Data is crucial to optimizing your pricing structure, and that’s true in many areas of business. In his book, Traction: Get a Grip on Your Business, Gino Wickman points out that, without data, businesses are flying blind, unable to gauge where they are, where they are going, or whether they are headed in the right direction. He likens the absence of factual information on which to base decisions to “managing assumptions, subjective opinions, emotions, and egos.” So how do you get the data you need?
Wickman recommends implementing a “Scorecard” – which you’ve also heard about from me – that enables you to quantify your company’s results. The Scorecard is a time-tested tool that may also be referred to as a dashboard, measurables, or key performance indicators. The objective of the Scorecard is to provide activity-based numbers that are reviewed regularly and applied to decision-making. To create a Scorecard that fits your business, follow these steps.
- Determine and list about five to fifteen categories of your business that you’d need to track on a weekly basis in order to keep an absolute pulse on your business. Wickman suggests spending an hour with your leadership team to come up with this list. Create a spreadsheet on which to track the list. It will be specific to your company, but your Scorecard will likely include the following:
- Weekly revenue
- Cash balances
- Weekly sales activity
- Accounts receivable and payable
- Client project or production status
- Customer satisfaction or problems
- Include a column in which you list the person who is accountable for each category. This will typically be the person that heads up that major function and will be responsible for delivering the applicable number each week.
- Decide on the expected goal for the week and include it on your Scorecard. These numbers will be tied directly to your one-year plan.
- Create columns for the weekly dates when you’ll fill in your Scorecard numbers.
- Choose who will be responsible for collecting the numbers, filling in the Scorecard, and decide how the data will be collected.
- Put your Scorecard to use! Review it weekly and apply the guidance your data provides.
Your Scorecard will become an invaluable, proactive tool that you’ll rely on for ongoing decision-making and much more. It will also help illustrate how the “Five Ps” come into play relevant to business success and profitability. Once you have 13 weeks (a full quarter) on your Scorecard, you’ll be able to see patterns and trends. And you’re creating historical data, which can be very useful, especially for long-term planning.
Using a Scorecard can create an organizational shift in that your leadership team can take a proactive approach to solving problems since you’ll have the hard data to identify not only current issues, but to predict future ones. Best of all, you always have an accurate picture of where you really are and where you’re headed.
As the former owner of a multi-million dollar company, I’m a CFO with a CEO perspective, which provides me with a unique understanding of the Five Ps of Business Success and how each contributes to a company’s overall performance. I’d welcome the opportunity to help you develop your pricing model, as well as your unique Scorecard and the confidence that comes with knowing where you are and that you’re on track to get where you want to be.