The Signature Marketing Series

Principle #6
High Gross Profit Sales... Always

Years ago I began printing basic pricing and inventory formulas on the back of my calling card because most people I met did not know how to set a selling price based on their cost of merchandise — or, conversely, how to arrive at an acceptable cost of merchandise when they knew the price point at which the item should be sold.

Or how to calculate important indicators like Markup Percentage, Turnover, Inventory Return on Investment, Percentage Return on Inventory, etc.  Successful businesses strive constantly to do more with less — and the use of such indicators to actively manage product pricing, inventory turns, people productivity, etc., is a very important part of their success.

Pricing has an immediate impact on your business — positive or negative.  That's why it's strategically important.  Unfortunately, common sense pricing is not always common in practice — due sometimes to lack of knowledge of how to set prices, but much more frequently simply to bad assumptions based on the unquestioned acceptance of prevailing myths and rules-of-thumb.  Pricing determines the profit of your business both directly — as the result of revenues less costs — and indirectly — in its influence on stakeholder (customer, vendor, employee, investor, etc.) perceptions.

Let's look at three common myths that tempt entrepreneurs to lower their pricing — tending to lead inexorably to their ultimate business failure:

• Myth #1: Low-Price Leadership is Sustainable.
   
  For a small business, there are no economies of scale — and, therefore, low-price leadership is not sustainable.  Wal-Mart and K-Mart can operate on 18 to 20% mark-ups because of their large turnover — but your business can't.  If you believe your customers' loyalty is to price alone, you are destined to wind up in a "How long can we go and still add margin dollars?" battle with your competitors.  If your competitors are larger — or better financed — or better connected — the odds are overwhelming that you'll lose.
   
  In making volume pricing decisions, be very careful of over-reliance on your cost details.  Most entrepreneurs' cost details represent best estimates (including cost reduction ideas) — and exclude the extraordinary (never to happen again) mistakes that caused overtime and material waste on the last order. Be assured that the highest percentage of credit problems, schedule changes and other cost impairments will come from your discounted high volume deals.
   
• Myth #2: The Market Knows the Value of Your Product.
   
  Salespeople do what they are trained to do.  Their job is to close orders — to bring in revenue.  When they are sitting in front of a customer and are asked to lower the price, they decide who is easier to sell — you or the customer.  If you haven't given them firm pricing rules — and adhere to them — don't be surprised when they decide the easier sell is you.
   
  High gross margin dollars are absolutely necessary to your small business — to pay the selling expenses of telling the market the value of your products and services.  You must be willing to risk losing orders — regardless of their perceived importance — if they cannot be obtained at pricing that yields a real (not estimated) profit.
   
• Myth #3: Lack of Profits is Usually Caused by High Costs.
   
  It's easy to underestimate your operating and overhead costs in setting prices.  And the cost most frequently underestimated is what it costs to sell the product or service — including everything from salaries for salespeople, to their travel expenses, to advertising, to shows and conferences, to distribution markups, etc.  In a $3.50 box of cereal, for example, the highest costs are $.50 for advertising and coupons.  The flakes are next at $.07.  Almost all the rest is transportation and the manufacturer and distribution mark-ups.
   
  Believing that lack of profits results only from high costs fails to recognize the importance of setting — and maintaining — adequate-margin pricing.  Be sure to include all your costs in your prices.  And if that requires pricing away some business, so be it.  That's the business most likely to put you under.