A small increase in what you charge for your goods and services can make a tremendous difference to your bottom line. The fact is that many businesses could charge more for their goods and services than they do, but fail to do so. Owners often do not realize the great value of charging just one-percent more. In this article, we’ll explore how charging even slightly more can dramatically impact your business.
Let’s consider a hypothetical example. A business owner tells a potential buyer that he or she could safely increase their prices by 1.5% and do so without the price increase causing any negative impact to sales or business disruption. The savvy buyer quickly realizes that the business, which has $70 million in sales, is leaving $1 million dollars on the table by not increasing its prices by 1.5%. A smart buyer realizes that after purchasing the business, all he or she has to do is institute this small price increase in order to achieve a sizable increase in profits.
In his best-selling book The Art of Pricing, Rafi Mohammed explores the often-overlooked area of pricing. He keenly observes that one of the biggest fallacies in all of business is to believe that a product’s price should be based on the cost of the product. In The Art of Pricing, Mohammed points to several examples. One comes from the restaurant industry. He points to the fact that McDonald’s keeps entrée prices attractive with the idea of making up profit shortfalls in other areas, ranging from desserts to drinks and more. Or as Mohammed points out, McDonald’s profits on hamburgers is marginal. However, its profits on French fries are considerable.
Mohammed’s view is that companies should always be looking to develop a culture of producing profits. He states, “through better pricing, companies can increase profits and generate growth.” Importantly, Mohammed points out that it is through what he calls “smart pricing” that it is possible to extract hidden profits from a business. Summed up another way, pricing couldn’t matter more.
All too often business owners, in the course of their day-to-day operations, fail to place sufficient importance of pricing. Any business looking to achieve more will be well served by first stopping and taking a good look at its pricing structure.
Likewise, buyers should be vigilant in their quest to find businesses that can safely increase prices without experiencing any disruption. At the end of the day, small changes to pricing can have a profound impact on a company’s bottom line.
The simple fact is that most of us want to control our own fate. This fact is especially true for entrepreneurs and business owners. However, the truth of the matter is that for most business owners, their fate isn’t completely in their own hands. For example, a variety of forces can prevent businesses from establishing their own prices.
Knowing whether or not your company has pricing power is essential and can influence a range of decisions that you may make. Let’s take a closer look at what steps you can take to control your own pricing.
What is Pricing Power?
This economic term describes the effect of a change in a product price on the demanded quantity of said product. Your company’s pricing power is linked to the demand for your products or services. If you have a high level of pricing power, you can raise your prices over time and maintain your customers.
Who Has the Greatest Pricing Power?
It is no great secret that the Amazons, Apples, Wal-Marts and auto manufacturers of the world exercise a tremendous amount of power. Part of this considerable, and seemingly ever growing, power resides in the fact that the size of these companies now rivals and even surpasses many nation states. This grand level of power is unique in human history in many ways. Along with it comes the ability to exercise an almost god-like authority over suppliers.
Today, these ultra-powerful companies commonly dictate to vendors what prices they are willing to pay, and the quasi-monopolistic nature of these companies often leaves vendors with no choice to comply. In short, these 900-pound gorillas are telling companies both large and small exactly how much they will pay for a given number of bananas.
Step 1 – Providing a Branded Product or Service
If you discover that your company doesn’t have pricing power, there are steps you can take. One step is to produce a branded product or service. In this way, you are able to offer something of greater value than your competitors. Through having a branded product or service, it is possible to create a higher perceived value in the minds of not just the Amazons of the world, but in the minds of consumers as well.
Step 2 – Innovating
Another path towards achieving pricing power is through innovation. A great example of leading the way in innovation is Apple. While few companies have Apple’s almost ethereal resources, that is not to say that you cannot find ways to innovate within your own sphere or industry. Small innovations can often have an outsized impact and help a business stand out from a crowded playing field. Innovation that leads to patent production is an excellent way to gain a degree of pricing power.
Step 3 – Offering Exceptional Service
A third option for achieving a degree of pricing power is to provide what could be called “mind-blowing” service. By providing service that is truly a cut above what the competitors can match, your company is positioned to achieve pricing power. Providing your customers with something they simply can’t get elsewhere is a key way to setting a price that is more in line with what you desire.
There are many marketplace variables that your business can’t control. The trick is to evaluate your business, your business’s potential and the concrete and practical steps you can take starting today to achieve pricing power.
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John Warrilow is the founder of The Value Builder System and accomplished author. While not a business broker himself, Warrilow has gathered considerable knowledge and expertise on the industry. His previous book Built to Sell was listed as one of the best business books of 2011. In this article, we will explore some of the key points in Warrilow’s latest book, which is entitled The Art of Selling Your Business: Winning Strategies and Secret Hacks for Exiting on Top. This book was released on January 12th, 2021 and is proving to be invaluable for business owners.
Selling When the Time is Right
One key focal point of the book is that business owners should skip trying to find the perfect “magical time” to sell their business. Additionally, Warrilow notes, “I make the strong recommendation in the book that the best time to sell your company is not during some mysterious macroeconomic environment. It is when someone is willing to buy it and you get an offer. And that is because at that point, you’re in the position of strength.”
The DIY Approach
This book reinforces the fact that business owners truly need to work with an intermediary if they are to achieve optimal results. Warrilow even includes his six reasons for why every business owner should hire a business broker or M&A advisor.
Many business owners think that they can simply handle selling their business on their own. But the simple fact is that business owners usually have no experience in selling a business. Add this to the fact that selling their business is likely to be the most important financial decision the business owner ever makes, and it quickly becomes clear that business owners are doing themselves a considerable disservice when they opt to handle everything on their own.
A Business Broker vs. a Lawyer
As Warrilow points out, oftentimes business owners think that rather than working with a business broker or M&A advisor, they can turn to a trusted lawyer who has served them in the past. But this thinking is flawed when it comes to successfully selling a business. As Warrilow states, “a lawyer, almost by default, is going to be very conservative as everything exposes a lawyer to risk. And that is why using a traditional attorney is almost always a mistake.”
If you are planning to sell your business now or in the future, a book like Warrilow’s The Art of Selling Your Business: Winning Strategies and Secret Hacks for Exiting on Top can serve as a uniquely valuable tool in your toolbox.
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No two companies are quite alike, and this also means that there are many reasons why companies can fall into trouble. While the number of variables involved in operating a company are practically endless, there are a handful of reasons why companies can fall on hard times. Let’s take a closer look.
Companies that lack focus can often run into considerable trouble. Not understanding their customers and what they need or want can lead to endless problems. It is vital that companies frequently stop and assess who their customers are and whether or not they are properly servicing their needs.
Not too surprisingly, many companies can run into trouble because of poor management. Management problems are not one-dimensional, but instead take a variety of shapes. Management that isn’t focused, is incompetent, or simply doesn’t care about the business can translate into a business’s premature death.
Under the umbrella of “management problems” also falls such missteps as poor financial controls, quality control problems, operational issues, and/or not keeping up with technological advancements. At the end of the day, many of the problems on our list have at least some management issue missteps at their heart.
Loss of Key Employees or Clients
The loss of a key employee or a key client can spell serious trouble. Of course, no management team can predict every eventuality. However, when there is a loss of a key employee or client, and there is no plan for replacement, then management does shoulder at least some of the blame. The savviest companies take steps to ensure that there are ways to replace the most important employees and clients.
Failure to Compete
More than one business has been buried by the competition or failure to see a new wave of competition coming. For example, countless mom and pop video rental stores were absolutely bludgeoned by the introduction of Blockbuster Video a generation ago.
While it is true that sometimes market forces are so aligned against a business that survival is almost impossible, that is normally not the case for most businesses on a year-to-year basis. The most effective and competent management can see the competition out on the horizon. Or at bare minimum, they have an emergency plan in the event that the competition becomes more intense.
All too often by the time a business realizes that it is in trouble, it is already too late. If the problems can’t be fixed, then it may be time to consider selling the business. But such decisions must be made quickly in order to prevent additional bloodletting.
Optimally, a business is sold while it is doing well. Regardless of whether a business is thriving or experiencing difficulties, a business broker or M&A advisor can be an invaluable ally in helping a business reach its full potential.
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Your time is your most valuable commodity. The simple fact of the matter is that many “buyers” are not truly buyers. In contrast, they are often window shopping or acting out a fantasy of buying a business. In other cases, they would only plan to buy if they were to find the “deal of the century.” The last thing you want to do is waste your time trying to work out deals with people who aren’t serious or qualified buyers.
The Plus and Minus System
The best way to find a serious buyer is to use a “plus and minus” system. This system will help you weed out the window-shoppers from buyers that are truly worth your time.
First, let’s evaluate factors for which you’ll want to deduct points. If a buyer needed outside financing, then subtract 4 points. Likewise, if a buyer has been looking for 6 months or more, you’ll want to also subtract 4 points. If a buyer has no cash available, you should subtract 3 points. Additionally, if a buyer is currently working in the corporate world, you should also subtract 3 points. These are the 4 largest reasons to subtract points, but they are not the only reasons.
Below are a few reasons to subtract 2 or 1 points from a buyer’s rating.
- You learn the spouse is not supportive – Subtract 2
- Prospective buyer uses a legal pad or clipboard and takes copious notes – Subtract 2
- The buyer indicates that they are in “no rush” and want to find the perfect business – Subtract 2
- The buyer is under the age of 25 or over the age of 62 – Subtract 1
- The buyer is currently renting even though he or she has lived in the area for some time – Subtract 1
Factors to Add Points In
There are also many factors that would make a buyer fall onto the “plus” side. If the prospective buyer does not currently have a job or has just resigned from their job, then add 3 points. Likewise, if a prospective buyer acknowledges that books and records are not the only metrics by which to judge a business, add 3 points.
Add 2 points if a buyer has enough money to buy the business and another 2 points if the buyer currently has no dependents. If a close relative or family member currently owns or has owned a business in the past, then add 2 points. If the buyer is between the ages of 25 and 62 add 1 point. If he or she is a skilled worker or professional, add 1 point. Finally, if the buyer does not consider location to be a prime consideration, add 1 point.
This streamline, straightforward and relatively simple system does work. Use this system consistently, and you will quickly eliminate a large percentage of window shoppers. While no system is perfect, this “plus-minus” system for accessing prospective buyers will save you countless hours and many potential headaches.
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