Getting the right pricing for business on most of the lines and products of your company can be hard, to say the least. Not only can the present financial climate make it hard, proCFO in Perth, virtual CFO can help you understand exactly what and how to charge, and much more so if you are charging for a service. It requires reading the market, negotiating with customers and responding to changes in the price of raw materials.
Above all, getting the price right requires ! – The courage to not only know your value but to know how to communicate it to both your existing and potential customers.
In our recent proCFO case study: How To Get The Pricing Right In Your Business, we share with you an example of how the wrong pricing can dramatically impact your business, and how a Virtual CFO can help you get it right.
A business in trouble
Recently, we worked with an impressive business that supplied plumbing parts including several products not widely available elsewhere. With a successful 10 years under their belt and a diverse range of customers, including major players such as Bunnings as well as many independent plumbers, the business seemed to be tracking nicely.
However, upon a change of ownership, things started to go downhill…
Although the new owner was very experienced in manufacturing, he had no prior experience in owning and running a business whatsoever.
This inexperience meant he did not keep an eye on the critical Key Performance Indicators for his business and frankly, the business would likely fail within 6 – 12 months if they didn’t do something different.
Profits were sinking, gross profit margins were up and down (but mostly down) and, not surprisingly, their cash flow was terrible!
On top of all this, they had a debt with the ATO of more than six figures and could see no way of paying it back. Without serious intervention, they were at serious risk of failure.
This is where a Virtual CFO came in to investigate, understand and resolve the problems at hand, in order to keep the business afloat.
When pricing goes wrong
Following the review of several years of financial and customer sales records, our Virtual CFO came to a few conclusions:
- The business owner hadn’t changed the product prices for five years
- There had been no adjustment to product prices to reflect the increase in material costs
- Customers with the lowest volumes were getting the biggest discounts
You can see which direction we’re heading in here? All the problems surround pricing!
And this caused major problems to the business’ cash flow, which in turn caused the business’ gross margins to decline year after year.
So, what did our Virtual CFO do?
Our Virtual CFO decided to put a tiered pricing structure in place – A great way to increase your prices, without the pain!
How does it work?
Basically, each volume level of purchasing would be eligible for a certain discount. As the purchase volume grows, so does the discount.
Better still, this matches the value of each client with the discount, encouraging loyalty.
In addition to a tiered pricing structure, the Perth Virtual CFO implemented an across the board increase of 10% in order to account for any supplier price rises taken onboard previously.
This price rise and new pricing structure meant those customers who complained a lot, we’re going to get a hefty price hike – We bet they’re having second thoughts about complaining now.
What happened from here? How did this go down with the business owner and how did the customers react?
As you can imagine, the business owner was initially concerned with the possibility of losing customers. However, he also understood that the business would likely fail without it – And so, it was a risk he was willing to take.
He sent written notification to all the customers, informing them of the price changes and date of effect.
The business owner waited anxiously for the phone to begin ringing off the hook with complaints. It didn’t. The phone was silent. Not one single customer complained about the new prices!
Perhaps they knew all along that they had been getting products below market rate, or perhaps they simply understood that businesses need to increase their prices from time to time. Either way, once prices fell in line with those of their competitors, they simply accepted those changes as the cost of doing business.
Additionally, the business took our advice and set up a system to re-evaluate prices six monthly. If they were no longer in line with the market and raw material costs, they would inform customers of another price increase.
Over the next two years, the business increased their prices to align with market changes and their customers continued to accept these changes and conduct business as usual.
Overall, these changes had a dramatic impact. Not only did the company maintain their customer base and market share, it completely reworked its financial position.
The business was profitable once again and they had cash flow to pay off their ATO debt.
The resulting improved financial statements also made the firm much more attractive to banks, investors and partners interested in working with them.
Further, the business relocated to larger premises with more automated equipment and won some long-term contracts – Not a bad result of a few price increases!
As you can see, the wrong pricing can dramatically impact your business. With the right prices, structure, regular pricing reviews and a Virtual CFO guiding you along the way, your business can get back on track in no time.
Want to find out how to develop the right pricing strategy for your business?