Archive for 2013

A Healthy Business looks like this….

When I examine the financials statements of a business, privately held or public-traded (read: it doesn’t matter if you’re small or big), I look for the follow attributes…..

  1. Consistently increasing revenue – Sales don’t have to be up every year, but the long term trend should indicate consistent upward growth.
  2. Healthy gross margin – This is a tricky one because it’s so unique to the industry. So let’s agree that as a starting point, GM needs to be better than the industry benchmarks. Anemic gross margin could be a sign of significant competitive pressure, or lack of competitive advantage. These situations lead to cut-rate pricing or significant discounting, which is not part of a healthy business.
  3. S, G & A or overhead expenses that are 30-60% of gross margin. Remember that this is before interest, depreciation, and other expenses. There’s quite a range here, because some businesses are more capital intensive than others. Some businesses require constant reinvestment in equipment, facilities, tooling, etc. While other businesses, such as accounting offices, require little capital investment.
  4. A return on equity that is consistently moving upward. This tells me that the business is disciplined. In other words, they have the discipline to keep tamping down overhead expenses, and the foresight to actively reinvest in their business cycle.
  5. Little spending on R&D; and not to be confused with innovation, which is critical to the business growth cycle. The organization must maintain healthy financial results, stave off competition, and grow market share without constantly reinventing themselves, or without relying on the next break through.

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5 Keys to Pricing

What is the best price for your products or services? It isn’t based on how many customers you have, how many salespeople you employ, the standards in your industry — or even what you’ve charged in the past.

Instead the best price is the amount customers will pay that effectively earns your company the maximum profit. In my experience, I’ve found that it’s significantly higher than what you’re charging now.

To help determine the best price for your product, here are five keys to remember:

1.  The ultimate judge of whether your price delivers a superior value is the customer. Are your customers willing to pay more than you’re charging? One tell tale sign is if they’ve been complaining about your high prices. Not one customer, but lots of them. If not, you’re probably not charging the maximum allowable rate (MAR).

2. Managers often make fatal pricing decisions when they misread their competition. Every company and every product has competition, and sometimes it’s not an exact replacement of your product but rather the best alternative. Think driving instead of flying, or watching free fireworks at the city park with a basket of wine and food, instead of booking a table at your restaurant.

3. If you sell through “middle men” to get to the end-users of your products or services, those intermediaries affect your prices because you have to make their margins large enough to motivate them. You must also consider the expenses that intermediaries add, and then make sure they add value to the relationship between you and your customers.

4. How compatible are your products with each other? With your marketing objectives? With sales goals? Pricing is not a stand-alone decision. It must work in concert with everything else you’re trying to achieve.

5. Although the cost of the product is irrelevant to the customer, you shouldn’t ignore the direct and indirect costs. Too many businesses stop with an examination of their gross margin, and don’t parse out the margins on a product by product basis. Adjusting sales price based on the individual product cost, attributes, competition, etc. is a powerful way to increase your bottom line.

Pricing is one of the most dynamic tasks in any business. Be restless, be ruthless if need be, but don’t price it and ignore it.


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