If you listen to the media, one could conclude that the entire country has ceased to function and without Government coming to “rescue” us, we will all be paupers in short order.
I disagree and regardless of whether the government has any direct impact on you and your business, I want to share three growth strategies that every organization can consider to not only survive, but thrive during and after the current economic turmoil.
Strategy 1- Raise Prices
While the temptation in tough times is to succumb to the demands for lower prices to retain customers and business, DO NOT DO IT! Let’s do the math to see why it is a fast track to disaster if you cut prices!
The calculations in the tables below show what happens under 3 different sets of conditions, a price reduction while maintaining a fixed dollar amount of profit, a price increase while maintaining that same amount of dollar profit and a price increase while maintaining the same number of jobs per year. Note that in all scenarios, the cost per job remains constant.
Discount Your Price
|
Price Change |
Revenue/ Job | Total Cost/Job | NetProfit /Job | Total # of Jobs/ year to Achieve Goal | Total Revenue/Year | Total Cost/Year | Company Profit Goal(Dollars) |
| Base | 1000 | 900 | 100 | 100 | 100,000 | 90,000 | 10,000 |
| - 2% | 980 | 900 | 80 | 125 | 122,500 | 112,500 | 10,000 |
| - 5% | 950 | 900 | 50 | 200 | 190,000 | 180,000 | 10,000 |
| - 10% | 900 | 900 | 0 | ??? | ??? | ??? | 0 |
This scenario shows what happens when prices are discounted from 2% to 10%. At a 2 % discount, this company must do 25 additional jobs to achieve the same $10,000 profit. At a 5% discount, a company must DOUBLE its job count to achieve the same profit and at a 10% discount, all profit is gone!
Increase your Price
Now, look at what happens when we institute a small price increase. In a tough economy, we may have fewer jobs; people may delay or cancel work they would normally have undertaken. However, you need to maintain the same profit level to pay all your obligations and stay in business.
|
Price Change |
Revenue/ Job | Total Cost/Job | Net Profit /Job | Total # of Jobs/ year to Achieve Goal | Total Revenue/Year | Total Cost /Year | Company Profit Goal(Dollars) |
| Base | 1000 | 900 | 100 | 100 | 100,000 | 90,000 | 10,000 |
| + 2% | 1020 | 900 | 120 | 83 | 84,660 | 74,700 | 9,960 |
| + 5% | 1050 | 900 | 150 | 67 | 70,350 | 60,300 | 10,050 |
| + 10% | 1100 | 900 | 200 | 50 | 55,000 | 45,000 | 10,000 |
In the table above, we show what happens when we modestly increase our fees by between 2% and 10%. Notice that with only a 2% fee increase, we can make the same net dollar profit with 17 FEWER jobs! With a 5% increase, we can make the same net profit doing 33 less jobs! So, if we anticipate less volume of business, we can maintain our necessary level of profitability by slightly increasing our prices on the business we do have!
Increase Price & Maintain the same number of jobs
Finally, let’s see what can occur when we are able to maintain the volume of work AND increase our fees. This scenario indicates that when the number of jobs remains steady, revenue will go up slightly, but profitability is greatly improved.
|
Price Change |
Revenue/ Job | Total Cost/Job | Net Profit /Job | Total # of Jobs/ year to Achieve Goal | Total Revenue/Year | Total Cost/Year | Company Profit Goal(Dollars) |
| Base | 1000 | 900 | 100 | 100 | 100,000 | 90,000 | 10,000 |
| + 2% | 1020 | 900 | 120 | 100 | 102,000 | 90.000 | 12,000 |
| + 5% | 1050 | 900 | 150 | 100 | 105,000 | 90,000 | 15,000 |
| + 10% | 1100 | 900 | 200 | 100 | 110,000 | 90,000 | 20,000 |
The real question you have to ask yourself is “Do I want to be in business when the economy turns around?” If yes, implement a small price increase, DO NOT DISCOUNT!
Strategy 2- Offer Multi-Year Bundles
If your business is one where clients need your services periodically, whether it is monthly, quarterly or annually, offer an incentive to commit to a multiyear agreement. Craft a bundle of “extra value added” services that will be included at no cost in exchange for a 3 year agreement for example. Most of us have other things we can do that have very low cost but high perceived value to the customers and clients. What you gain is a customer for the term of the agreement. Further, that is a customer that is not subject to being enticed by offers from your competition.
Strategy 3- Mine Your Existing Customers
One of the often overlooked areas by many service businesses is making past and current customers aware of NEW Technologies that you may have that others can’t or don’t have available. Ask yourself, what new products or services do we now offer that could save money or time? You know (or should know) what is happening in your field or industry. That’s why your customers trust and rely on your company. Reaching out to them with new services and products that can impact their life, finances or productivity can lead to more business or at least retaining their business.
Further, when you reach out, it provides an opportunity to ask if there are others they know that should know you and the quality of service you provide. This is sometimes known as asking for referrals!
Conclusion
Often when times get tough, we are tempted to overreact without thinking about the possible unintended consequences of our actions. Discounting prices to drive revenue is a fool’s game and has put many a company in deep financial difficulty or out of business. Multi-year contracts are a great way to carry a base of revenue over from one year to the next and stabilize your revenue streams. It further hinders your competitors’ ability to grow. And finally, nurture those existing customers and ask them for referrals.
If you put into practice these three simple strategies, you will not only survive these tough times, but when the economy rebounds, you will be a much stronger company than before!
Dan Trudell is President of Peak Performance Associates, Inc. Since 1990, Peak Performance Associates has aligned people strategy with the business strategy of client companies. For more information on how Peak Performance Associates can help implement growth strategies in your business, please contact Dan Trudell at 608-835-9288 or dant@peakperform.net.