Raise profits (or even maintain)…that’s an important part of growing your business.

To do that you’ve got to understand the things that influence your profits and know how best to leverage them. Your goal isn’t to raise profits just because you can. It’s to do so in order to continue to be there for your customers. To build your business, shift and evolve and for some of you it’s about leaving behind that your legacy.

How many profit levers does a business have?

Do you know what they are?

Are you fully leveraging them?

Most businesses are not fully leveraging pricing. Most often because they’re so focused on the other levers. But here’s the kicker, price is the most impactful profit lever. Meaning if you want to raise profits, price is often the MOST EFFECTIVE way to do it. Or in the converse it could be the thing that’s draining your profits and sabotaging your efforts in other areas.

In this episode

I share more about the profit levers and take a look at the things that influence profits and how that relates to what your doing with pricing.

If you prefer to watch the live stream replay, use this link.

Favorite quotes from the episode:

“One of the aspects of being better at pricing is understanding that it’s more than just finding a number.”

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Show Transcript

Today we’re going to talk about profits. Yes. And ways that you can look at optimizing your profit using better pricing.

[00:00:34]Many of you have watched the show and listened to me talk about this. I want to repeat it again because I think it really merits your attention. That’s the study that was done by McKinsey back in 2003, where they looked at the impact of the four profit levers. In any business, there are four things that influence profitability, your fixed costs, your variable costs, your prices, prices. [00:01:00] Yes. And your volume. Of those four things, what this study showed was that pricing was for most businesses, almost any business, the most impactful profit lever. Meaning that the more attention that you’re spending on that, the better you’re actually managing your profitability.

It’s not about ignoring anything

Of course they all work in combination to either deliver profits or not. My point has always been that companies spend a lot of time, focused on costs and they’re not putting at least as much time into their pricing. And wondering why they aren’t getting the results.

[00:01:40]That is one of the reasons, because they’re not giving it the attention that it warrants. If it is indeed the most impactful profit lever in your business, that means that you need to be doing it better. What do I mean by better? One of the aspects of being better at pricing is [00:02:00] understanding that it’s more than just finding a number.

[00:02:02] Your job is actually to manage that price, those prices over time. Your job is to know how to communicate around those prices. Effectively your job is also to understand how pricing is influencing those profits. All of these things have to come together, along with how you’re setting your prices. As well, how you’re delivering those prices as well.

[00:02:26]You can see there’s much more to it than simply setting a price. And that’s where being able to optimize your profits through better pricing gets really interesting.

The Impact of 1%

Let’s take a look at a few ways that you can go about doing this. Before we get into that, there is one thing that you have to understand. Your figures. And how, when you make changes to your plans, price or your cost structure or your volume, how those things influence your profitability.  If you’re like one of these companies that were in the McKinsey [00:03:00] study on average, a 1% price increase yielded an 8% increase in profit, which was significantly bigger impact than the other three profit leavers. Again, why we’re having this conversation. When you know and understand those figures and you can make better business decisions because you understand the potential impact those decisions have on your business.

The Leaky Bucket

Sometimes when you look at what’s going wrong with profitability in your business, you might find out that you’re positioned improperly, right?

So that your price position, you’re there to too high of a price or too low of a price. If you remember back to an earlier episode where I spoke about the leaky bucket of pricing, you’ll know that how you position yourself in the marketplace is like the tap.

[00:03:54] That you’re using to fill your bucket, right? If you turn that tap on and there’s a nice, [00:04:00] powerful stream of profit coming into your profit bucket, then you’re doing well. But if you’re not positioned well, then you’re going to be working with a tap. That’s just kind of dripping bits and drabs of profit into your business.

Correct Position

[00:04:14] That’s definitely what we not don’t want. Making sure that you’re positioned correctly is one aspect. A lot of times what happens to businesses over the years is they set a price, but they don’t really take the time to continue to monitor and see when those prices need to be adapted.

[00:04:32] And how so? Two, three, five, 10, or more years down the road. Something’s not working right.  Then you realize that actually your position in the marketplace no longer actually suits either what the customer is looking for or what the competitors are offering. Something has changed and maybe you need to reposition yourself.

[00:04:54] Now, back to the leaky bucket. The other aspect of that leaky bucket is your transactional pricing. [00:05:00] Sometimes it’s not that you’re positioned wrong. Is that what you’re doing during the selling process is actually disrupting your profitability or ruining your profitability. If you want to put it that way.

[00:05:13]Every transaction that you make, if you say my price is a hundred, then every time you sell it for anything less than a hundred, you’re putting a hole in that bucket and your profits are leaking out. It may not be that your position is wrong in the market, it may be that the wheeling and dealing that you’re doing the special offers that you’re making.

[00:05:35] Even if you’re a B2B business and you’re working with channels and you have a discount and rebates scheme, sometimes that can get out of control and you’re granting discounts where you don’t need to, or where you shouldn’t be.  Again, those are just more holes that you’re putting in that bucket and leaking out profits.
[00:05:55]Those are two areas that are very much related [00:06:00] to your pricing, your positioning, and the transactional side.

Breadth of Offering

Now another thing that can really affect your profitability is actually the breadth of your offering. What do I mean by that? Well, you’re going to have different offers that you make or different products in your offering.

[00:06:18]If you have too many or too few or the wrong combination, that will also impact what people are willing to pay. Or if you have too many things on offer, certainly it could be confusing for them. They can’t figure out how much it might cost them. Or they’re not sure what’s right for them and they go somewhere else where it’s easier to figure that, figure that out. All of a sudden, their willingness to pay for what you have to offer is very much influenced by their experience and trying to understand the offer itself. That’s why it’s so important to make sure that your offer is fit for purpose.

[00:06:53]That breadth of how much of the offering that you deliver to customers can be very [00:07:00] influential in when it comes to what they’re going to be willing to pay.

Your Cost Structure

Your cost structure is going to be a big influencer on your profitability. Sometimes it will also have an impact on your pricing. Just because something in your cost structure goes up or down does not necessarily mean you should move your prices up or down.

[00:07:22] Yeah. That is one way that you could accommodate that, but there are other things that you could be doing as well. When it comes to optimizing profitability, maybe that cost structure will affect your pricing may be not. One caveat here quite often what businesses do when their costs go up is they raise prices and give customers that as the reason for their prices are going up. That can be risky because of course, if you do that, when they go up, then if the costs go down, the expectation is your prices will go down as well. 

Maybe you do, maybe you don’t want to have that as a policy. [00:08:00] Again, when you’re talking about optimizing profit, this has an influence on your profit calculation, but it may or may not also influence your prices.

Next, shift in the competition.

If what’s going on in the competitive environment shifts, it’s going to have some impact on your profitability. if you haven’t taken action or adjusted your own business to that, then you’re definitely going to run into problems. What happens oftentimes is this kind of a slow demise.

[00:08:33]Quite often it doesn’t happen all the sudden, but it will happen slowly over time. Things will shift and change. You will just be going along, doing your thing in your business. Then one day you’ll feel the pain of those changes, but not at first, usually can’t really define what it is.

[00:08:50]Without further review, you might not realize you need to go back and take a look at that value map that you did and understand how things have changed in the marketplace and [00:09:00] what that means for your pricing, for your offering, even for your cost structure. Shifts in the marketplace are something that are happening all the time, and if you’re not monitoring what’s out there, then you may not realize  what’s creating the pain that you’re feeling on that profitability side. Or what’s making it so difficult for you to optimize your profitability. Keeping an eye out there on the market is going to help you be able to know when you can take action to optimize and what to do in order to optimize.

Shifts on the customer side

One more category that I always find really interesting is when things are shifting with the customer.  

What often happens again, if you’re not really keeping a finger on the pulse of the marketplace is the wants and needs of your customers can change. The customers who are enjoying your offers or your products and services that may change over time. Maybe some people have [00:10:00] gone to a different direction to a different competitor and different people are coming to you.

[00:10:05] Somehow that market has shifted in the types of customers that you’re serving. If you’re serving different customers that very well may have an impact on your profitability and also potentially on your pricing. All of these things that we’re talking about here are things that are affecting your business.

[00:10:25] Affecting the people who are interested in your offers, how much they’re willing to pay, and therefore opportunities for you to be able to leverage or further optimize profitability in your business. This is why this topic is so fascinating to me and why the study from McKinsey is so interesting because as I said at the beginning, so many companies are overly focused on the cost side of it and not fully leveraging the opportunity that they have in pricing.

Small changes in prices will [00:11:00] usually yield bigger changes in profit then small changes in your costs or in your volume? Of course, yes they all work together, but people very often overestimate the elasticity of their prices. Meaning that they think if they lower the price a little bit, a lot more people will buy from them. Or if they increase their price a little bit, a lot of people will stop buying from them.

That’s what price elasticity is.

But the reality is in most industries and especially, and small businesses, this is rarely the case that prices are that elastic. You can tweak those prices in different ways, you don’t just have to add an increase, you can actually do this in a more clever way for your business.

[00:11:47]Tweak that and actually get bigger returns on the profitability side, which then you can reinvest back into your business or take home and have a big old party. That’s up to you. The point [00:12:00] here is that you have an opportunity to boost profits in your business when you’re using pricing in the absolute best way you can.

[00:12:07]That’s why there’s people like me to help you see how you can do that best.