March’15

Marketing Tip

Determining the right price to ask for your products or ser-

vices is one of the trickiest parts of your marketing strategy

because it takes time to determine how much your customers

are willing to pay, learn how your costs behave, and emotions

play a big role.

The following is a real life experience. I worked for a company

that had two primary services, service #1 and service #2 (to

keep company’s privacy). Revenue from service #1 was the

company’s bread and butter and production demands peaked

during the first week of every month; the demand for service

#2 varied throughout the month. Production peaks caused

over-time expenses, employees were unable to make plans,

and most mistakes occurred the 1st week of the month.

One of my responsibilities was to call client, explain the mis-

take, and apologize. Increasing sales became a double edge

sword since mistakes accompanied them. I started thinking of

lowering pricing for service #2 since the company’s cost struc-

ture were 60% fixed and 40% variable. This cost structure

prompted the idea to lower price for service #2 during lower

production needs for service #1. I strongly believe against

lowering pricing and I knew the company owner would op-

pose idea so I looked for proof that my hunch was revenue

and profit positive.

I designed an excel spreadsheet and re-entered all the work

orders for the last three years. The spreadsheet had joysticks

so we could determine total revenue and net profit under

different pricing scenarios. Company owner agreed to lower

price by 15% for service #2 during the 2nd, 3rd, and 4th week

of every month. Total revenue increased, employee satisfac-

tion increased, and mistakes reduced within 6 months of price

change. Pricing is a tool that can be used to maximize your

profit once you know your market and your costs. For exam-

ple, the revenue needs to increase by $2.50 for every $1 of

increased fixed costs, under the same 60/40 cost ratio.

Your business is unique and so will be your pricing strategy.

Call us at (520)515-5478 or e-mail us at nortonr@cochise.edu

to set-up an appointment to develop strategies to maximize

your profits.

Pricing

Cornerstone of your revenue stream and profits