Price – A Vital Component of Your Profitability Strategy
Much of my work with small to mid-size business owners focuses on implementing the financial fundamentals to maximize profitability and cash flow. Profitability is affected by a variety of factors – not all of which are strictly financial.
I refer to these as the “Five Ps” of business success: Product, Pricing, People, Process, and Planning. These foundational elements encompass the resources critical to a strategic plan that prioritizes factors to move your company forward, maintain positive cash flow, and create an environment for growth.
Your product or service is the manifestation of your vision. It is the tangible result of what motivated you to start your business and the vehicle for fulfilling your mission.
But pricing is the most vital component for making money; the right pricing structure is central to your company’s strategy to increase profitability. Pricing is actually an element of “data.” Without the factual information on which to base decisions, businesses are flying blind, unable to gauge where they are, where they are going, or whether they are headed in the right direction.
In his book, Traction: Get a Grip on Your Business, Gino Wickman recommends implementing a “Scorecard” that enables you to quantify your company’s results – a concept I use frequently as well. A time-tested tool which may also be thought of as a dashboard, the scorecard will help illustrate how the Five Ps come into play relevant to business success and profitability by providing activity-based numbers that are reviewed regularly and applied to decision-making.
Specific to the Pricing component of your own business, consider the following questions as you develop your Scorecard and its categories.
- What are your profitability goals – what profit level do you want to achieve?
- Is your product or service priced to be profitable?
- Have you developed a formula to achieve your gross profit?
- Do you have an accurate knowledge of your costs?
- What products, based on a profit review and analysis, yield the highest gross profit?
To create a Scorecard for your business, follow these steps:
- With input from your leadership team, determine and list five to fifteen categories you need to track on a weekly basis to maintain an accurate reading on the pulse of your business. A spreadsheet works well for tracking these categories, which 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 the goal you’ve determined for the week and include it on your Scorecard. These weekly numbers will be directly associated with your one-year plan.
- Choose and create a column for the weekly dates when you’ll fill in your Scorecard numbers.
- Decide how the data will be collected and who will be responsible for collecting it weekly and updating the Scorecard (typically the individual who heads up that major function). Include a column in which you list the person who is accountable for each category.
- 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. Once you have 13 weeks (a full quarter) of data, patterns and trends will become apparent. The historical data you are creating can be valuable, especially for long-term planning. A Scorecard can help 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 are and where you’re headed.
I work with growth-oriented companies to help them build a sound financial infrastructure that enables accountability, profitability, cash flow, and growth. 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.
An analysis of financials – cash conversion cycle, working capital, receivables, debt/equity ratio, and statement of cash flow – demonstrates how the Five Ps come into play relevant to your own business profitability. In the coming months, I’ll address the additional Five Ps in more detail. In the meantime, feel free to contact me to discuss how I can help you integrate these foundational elements for success into your own profitability plan.