Value vs. Price

Friday, February 12 2016

You probably set out to provide a fair price for value, but is your company under-valuing itself? The simple test is to look at your bottom line. Common wisdom suggests that most companies are lucky to turn a profit at all; and if they do, often they are generating low percentage profits, 5% or less. That’s simply not enough to provide a return to shareholders, incentivize your employees, or reinvest in your business.

If your business generates a 5% profit before tax, what would be the impact of a 2% increase in prices? In simple terms, that 2% will likely flow through to the bottom line, equating to a 40% increase in your profit dollars ($5/100 becomes $7/100). It is surprising that many companies do not have processes in place to raise prices, even if only to recoup rising costs.

So what does this have to do with organization and strategy? First, adopt/create a strategy to achieve a specific profit target then put in place the processes to ensure you maintain those targets.

Next, clarify what you believe sets your business apart from your competitors – people, quality of materials, technology etc. Odds are it costs you money to maintain that edge. So you owe it to your company to maintain and grow margins:

  • Keep a close eye on profit levels and watch for slippage
  • Ensure your client agreements have price escalation clauses, and be sure to implement them when required
  • Provide your sales staff scripting to support increases when they occur
  • Increase prices when you add value

Be bold – start by adding just 2% to some of your prices. You’re not being greedy; chances are you’re underestimating your business costs (hence the low profits). It’s responsible to build in a slight hedge for the unexpected. Your strategy depends upon it.