The remarkable benefits of getting pricing right
We have explored the profit improvement potential through smarter pricing in context with all of the other ways to improve your business, and looked at the principal reasons why people struggle with the whole issue and so fail to maximize their profit.
This chapter covers four brief case studies that underline some of the difficulties of implementing change generally and on the issue of pricing specifically. Visit our website at www.markholt.co.uk and follow the links to download the full case studies.
This chapter covers:
Understanding what you actually charge at the moment
CASE STUDY
Fine Worldwide Goods Limited (FWG) was a £1.5m turnover business providing security services to a wide range of clients. It was doing OK, delivering profits and surviving well within its regional marketplace. The three owner/directors of this business were concerned that the business was not maintaining its marketplace position and that it was under increasing pressure to deliver more and more for its customers while charging less and less for doing so.
They started a year-long project to review their business and implement a series of changes that would enable them to regain their market position and also improve the underlying profitability. Countless issues were uncovered, and a wide variety of tools were used to research the key points, develop initiatives to handle them, and then train the team members in the changes proposed. Perhaps the most enlightening was the mystery shopper exercise.
When the owners met with the frontline salespeople and discussed some of the ideas, they were met with a wall of objections based around what competitors were apparently up to: ‘How can we charge that price if X Limited is charging less, or we can’t charge a callout fee, as our main competitor doesn’t?’ These were normal concerns that are encountered in any similar project, but, as usual, based purely on anecdotal evidence and assumptions of what the other businesses were up to.
Try as they might to argue the points, the wall of objections remained. So they undertook a mystery shopper exercise using an external adviser. The adviser agreed with them who their main seven competitors were, and then contacted these businesses and asked them to meet him at his offices to pitch for the opportunity to take him on as a customer. To get a good comparison he also got one of FWG’s team (who did not know of his role) to pitch as well.
It was an illuminating experience for these business people. One of the eight salespeople turned up was a little worse for drink, but at least he turned up, which is more than two of them did! Several launched into exactly what they could do for the adviser without having asked him any questions about what he wanted or needed from them, and only two put forward a sound pitch and a clear proposal for working together. One was FWG and the other their major competitor.
This exercise gathered a huge amount of valuable information about all the other businesses. They knew their competitors’ account opening procedures. They had copies of their marketing materials and a good idea of their selling approach and the key points they always made. Most importantly they had a very clear understanding of their competitors’ prices and the different packaging options that they were offering.
When the adviser analysed this information with FWG’s directors and sales team, they were astounded by what it showed. This is, of course, often the case with mystery shopper exercises, as it is perhaps understandable that in the absence of facts people simply assume that competitors are better and cheaper than they are, and they build up these reasonable concerns into unfounded fears. Just like walking into a dark scary house, people are frightened of all the things they imagine might be hiding under the bed or behind the door, until they turn on the lights and see that these fears are simply in their heads.
What the business found in this case was that they were not the most expensive, and they actually delivered better value for money than all but one of their competition. As a result, they spent time analysing all the data, essentially taking the best ideas of the competitors to improve the marketing messages, beef up the sales pitch, and re-structure the various packaged deals into more compelling offers. What the business gained was the confidence to really believe that they were worth the prices they were now prepared to charge because they knew exactly the service, quality delivered and prices charged by their competitors.
A side effect of this analysis was a detailed review of each individual product cost and their selling prices to see what gross profit they made on every item. On more than a quarter of their products they actually sold the item for less than it cost them to provide it.
The business was able to identify the items where the actual price charged (after the discounts given to customers) was less than the cost, how much below cost it was, and how many of those items they sold in the last year. Had they simply sold these products at cost, then the business would have made £100k more profit during that year!
The action taken was to review the price of every single item being sold below cost and adjust those upwards by increasing prices and limiting discounts.
Once again, there were a number of factors that affected the overall results, but raising the prices was the most significant. Over the course of the next nine months the business was able to see the volumes of each item sold and to quantify what revenues they would have achieved at the old prices and compare this with the sales figures actually achieved. The result was that they were now generating profit at the rate of £11k per month more than they did previously, such that in the next full year this would equate to over £130k of additional profits. This was 8 per cent of their turnover, but had the impact of trebling their bottom line.
Increasing the headline price (but with added value)
In Chapter 1 we considered the Five Ways to Grow your business. These were:
CASE STUDY
In Chapter 2 we looked at a brief case study of Dr Fun’s Amusement Park (DFAP). I was introduced to the family who owned and ran this business by a friend that had concerns about their situation. I knew the park well having visited it with my own family, but I was not aware of the precarious financial situation that unfolded from that initial meeting
Like many family-run businesses, it had started as a hobby that had just grown over the years. They started with a single ‘ride on’ steam train, and became a substantial tourist attraction with 100,000 visitors a year. The problem was that it had rarely been profitable in the preceding 20 years, and had survived only by borrowing against rising property values.
As a result, they had not been forced to address their weak financial performance and poor business management skills. This is a real problem for many organizations where owners, CEOs, directors and managers don’t address weaknesses in their businesses until the point at which they have no choice – by which time it can often be too late. In DFAP’s case, recession meant that asset values had fallen and as a result so had the bank’s security, and faced with continuing losses and an increasing debt, the bank issued the ultimatum of ‘get the business profitable within the current year or we will close it down at the end of the season’.
There were a number of elements to the situation that you may recognize. First, the business had never been properly managed. All key roles were occupied by family members, none of whom had any great skill in running a business. They relied instead on their knowledge of the business from living and breathing it for over 20 years.
Another important factor was that they were right at the edge of the precipice. The bank had issued their ultimatum, and was beginning to take control. Repossession of the business and the loss of incomes for all of the family was a very real threat, so that they had little choice than to get serious about changing. In this project and with others in similar situations, decision-makers tend to accept the guidance given to them much more readily when the business is in trouble. Often, incredible amounts of time are wasted persuading owners to act on what are simple and obvious points, but without the external pressure of a bank demanding action it is often hard to get them to make those changes.
It is imperative that any business monitors performance and acts early when these start going wrong.
Fortunately we had time. Our meeting took place in late February, so that we had an Easter Holiday period within a month and the whole of the summer holiday to make the changes count. Being a predominantly cash business, the impact of changes was felt almost immediately in the bank position. Compare this to, say, a building company where the time lag between action and result could be 3, 6 or even 12 months, and the advantage of working with a cash business is obvious.
The only real negative was the fact that the initial assessment had identified a great many weaknesses; so there was such a lot to do that we could well overload the family with the work needed. Usually, a gradual decline in profits is a result of a number of areas that require attention. The problem is that many business people will attack areas they feel most comfortable with, such as customer service or marketing, when pricing is the one that will have the greatest and quickest impact on the bottom line.
What the example below illustrates is what is possible with a planned and well-managed project that deliberately seeks to improve the profit of the business. Many people miss this key point and focus on improving turnover in the hope that it leads to increased profits. It is also fair to say that there were some parts of the project that were not related to how they priced the entry fees, food, drinks and souvenirs. For example, they uncovered – and stopped – significant theft of cash from the business, which is not the subject matter of this book. However, irrespective of these issues the overwhelming impact on profits was from the pricing changes implemented.
The entry price of the attraction was £5.95 per adult, with a number of variations for children, babies, OAPs, family tickets and groups. The proposal was to increase the entry price by 20 per cent. This was a big jump, but it was based on detailed market research on competitors, as well as customer surveys on what visitors liked and why they came in the first place.
Although the family were right behind the idea of boosting profits, it still took a great deal of persuasion before they were happy to put up the prices. Their acceptance came when we suggested offering something else to justify the uplift in price with an increase in value. So we developed the idea of a free return. Visitors who paid full price would be able to visit free of charge as many times as they wanted over the following seven days.
There were concerns about monitoring the return visits, but our research confirmed two key things. First, that only an insignificant number of visitors were already returning, preferring to try other attractions or use the beaches or other free facilities, rather than pay again to visit somewhere they had already experienced. This was important to ensure we were not giving away income by letting existing customers who currently paid to return, back in for free. Second, that the average spend per head was quite low as many visitors brought picnics and their own drinks to keep their holiday costs down.
Once the free return was operating, we were able to prove that 21 per cent of visitors came back for at least one additional visit. Further research found that these returning visitors were often going to the beach until it got too cold and then popping in to DFAP for an hour or two in the late afternoon, or going shopping in the local towns and then heading to the attraction when the kids had had enough retail therapy and wanted to let off some steam. Previously, visitors would simply not have come for a half-day visit when it cost the full price entry, but they now did so because it was a free return visit.
The most important point was that while these visitors were getting additional visits for free, the average spend per head showed a huge increase. On the free visits customers spent money on food, ice creams, drinks and souvenirs because they hadn’t had to spend cash on getting into the park. The average spend went from £8.20 per head to £10.40 per head. The fact that it took two or more visits to achieve this didn’t matter.
So what was the overall impact?
The business turned over £1m a year. It was losing money and had done so for many years. The year’s accounts that reflected the period over which the project was run, showed profits of £150k on similar visitor numbers. Perhaps the most important issue was that the bank did not call in their loans, and allowed the family to trade on and restructure their business and eventually to recover financially.
That example was one of the most dramatic improvements in such a short space of time, with just 10 weeks of analysis and hard work implementing the changes before the start of the summer season. After this we simply monitored all the numbers through the busiest part of the peak season to ensure the changes were continued, and to react if necessary to any negative impact.
How you can charge more when you guarantee value
CASE STUDY
Another tourism-related business, Coastline Vistas Limited (CVL), owned and let holiday homes. The business had been stable for some years, but struggled to make a decent profit simply because of the costs of running the business. They could have run 100 homes with the same infrastructure and personnel and would then have made a good profit, but they only had 40 homes and hence it was hard to massively increase revenues as a route to increasing profits. These properties seemed to be worth more than the owners currently had the confidence to charge. Indeed you could have rented one of their luxury four-bed homes with state-of-the-art TVs and fully fitted kitchens, etc for the same price as a caravan on a holiday park.
A price increase of £100 per week on each one was suggested. This was based on research of comparable accommodation in the same area. The client was understandably concerned as the nature of holiday rentals means that if you set prices too high or too low, then you are stuck with these for the whole season. Too high and you get no lettings; too low and you are busy fools for four months with no profit at the end.
What I suggested was that we add the £100 to the price of each week’s holiday, but with a special Summer Sun Guarantee. The offer was: If it rains for more than half your holiday, then you will get £100 cash back to contribute towards the cost of indoor activities, since you would be unable to enjoy the countryside or the beaches for free.
There was an incredible amount of debate about rain-monitoring systems and when refunds would be triggered, but that was immaterial. If it rained, they were only giving back this additional £100 that they would not have otherwise had. No competitors offered this guarantee.
The purpose of the exercise was to test the customers’ reaction to the higher prices, in order that the client might gain the confidence to hold or even increase these prices in the next and subsequent years. It was all about testing the market and exploring how presentation of pricing affects buying decisions.
The running costs of the business were unaffected by the price change. It is possible that they lost a few customers where the headline price now appeared too high, and with people who didn’t see value in the guarantee; but it is equally possible that they gained a few who loved the idea, which many told us.
The only important question is whether they made any more money as a result. In that year the turnover increased by £50k from letting the properties at an extra £100 per week over the summer. From this we then needed to deduct the amounts given back under guarantee. So how much did we give back? Nothing at all. Fortunately, the weather was great, and no one asked for refunds. The business made £50k more profit, doubling what it would have made without this price change.
You may be reading this thinking that it has no relationship to your own business either in scale or in the industry you work in. The point is much simpler than that. The fresh perspective on their business, looking at it as a profit-making machine, considered a number of ideas to improve the results. Despite resistance to the changes, this course of action more than doubled the results of the previous year. Could they, or would they, have come up with this idea on their own, and would they have had the courage to try it without external pressure? No. When you read on through the book, I guarantee that there will be other simple ideas and actions you could take that may well have the same impact on your business, but if you only see the reasons not to have a go, then you won’t make a penny more.
Making sure your frontline people understand the profit equation
CASE STUDY
Special Events Limited (SE Limited) was a huge multi-branch company with £20m annual turnover and healthy profits, achieving outstanding improvements by focussing on pricing.
They agreed to run a series of courses for all of the frontline people who were in one way or another involved in setting prices for customers. This included branch managers and department heads involved in setting list prices, and many others who set prices through the back door by giving various levels of discounts to customers at the point of sale.
It was important to raise the awareness of all of those frontline people to the consequences of their actions. The training sessions uncovered some incredible pricing inconsistencies between branches and even between individuals within the same branch. A key part of the project was to gain consistency in pricing and discounting practices across the whole company.
When we started, the business was making a gross profit margin of 22 per cent, across all of its products; ie on average for every £78 it spent on goods for sale, it achieved a selling price of £100. By the time we had finished, the business was making an average margin of 27 per cent. Turnover in that period had continued to creep forward, and we monitored the enquiries-to-sales ratios to be satisfied that we were not losing loads of sales as a result of holding our nerve on prices and giving away less in discounts. The increased margins equated to broadly a 6 per cent price increase, so it could easily have had a negative impact if poorly managed.
So, what was the impact on the bottom line?
The gross profit margin went up from 22 per cent to 27 per cent. Taking out the general turnover increase, this meant that the gross profit value on the core £20m sales increased from £4.4m to £5.4m in the year, an increase of £1m. There were some costs of handling the issue, not least of which was taking 130 people out of the business to participate in training sessions to understand and implement the various changes. There were some quite significant changes to their bespoke computer software to monitor who gave discounts to whom and why, so that they could maintain the changes agreed. In reality all these costs were significantly less than £200k leaving around £800k of real retained bottom line improvement. So although the business was already achieving around £2m a year of pre-tax profits, adding another £800k or 40 per cent improvement was a fantastic result.
This extra profit quickly became extra cash as debts were collected, enabling the business to finance its continued expansion and investment in technology and new equipment.
What you can see from these examples, and those in later chapters, and what you would see in every single one of the specific projects to improve profits, is that it is actually quite straightforward to make simple changes that can have a huge impact on the bottom line.
Whether motivated by financial difficulties or by a desire to make more money for future investment and growth, or even because the owners/shareholders want the kind of return on effort and risk that they deserve, doesn’t matter. The analysis and actions are the same. These wider business-improvement projects often cover a large number of different aspects, such as customer service issues, marketing activity and customer-relationship management as well as the profit-critical issue of pricing. Every business can increase prices by simply adopting a better approach to the way it charges and any improvements in these other areas can only help support a firmer line on pricing issues.
As detached advisers we can quickly identify underselling issues; ie where the business lacks the confidence to charge what it is already really worth, and lacks sophistication in the way that it does so. Even if this seems obvious to us as external advisers, we cannot always get the business’s decision-makers, whether one-man-band owners of small- and medium-sized businesses, or the CEOs, directors and managers of much larger organizations, to accept the points. As a result they don’t accept the need to increase prices and to add some smarter thinking to the way these are presented to customers.
So we need to consider other points such as customer services standards, product quality, reputation and market position, the competition, the quality of its sales and marketing activities and a whole host of other issues demonstrating the value that is being undercharged for at the moment.
There is a double-whammy effect in that many of these key business areas are revisited by the decision-makers for the first time in years. Time, effort and debate are applied to how they can be improved, and the understanding of their impact on bottom line profit is raised. It may be that this self-analysis actually helps raise their game in the key areas that enable them to charge more, or it may be that they gain a clearer understanding of what they already do and how this compares to others. The overall objective is to help the business to have the confidence and the underlying quality to charge prices that enable it to make a decent profit.
A key point is that hardly any businesses invest any significant time in analysing how they can improve profits. Whether faced with an urgent need to improve their financial performance, or simply a desire to make more money, almost all of them approach the problem of profit improvement generically by seeking to increase sales volumes and/or reduce costs.
What these projects do is to challenge the thinking of the owners and decision-makers who are blinkered by their internal perspective and limited to knowledge of their business or of their industry. It is crucial therefore that you retain an open mind as you read the detailed content of this book, or, if possible, work with someone outside of your business to help you to challenge your own ideas or established practices. That could be your accountant, or even another business owner you know for whom you can reciprocate.
Every single project we have run has seen an increase in bottom line profits, and the bulk of these improvements have been derived from changes in the prices they charge and the way they manage and control this issue.
Don’t be in any doubt that you can improve your profits, and that pricing is the first place that you should start.
This stuff works. The examples above are just a few to illustrate how quickly and how easily profits can be increased with just a little more attention and perhaps a little more sophistication to the subject of pricing. You may well be able to double your profits with a clearer focus on your pricing strategy.
In every one of these examples the decision-makers had reasonable concerns about the reaction of customers and the resistance from employees, but all proved unfounded. The impact was dramatic in every project, and in many cases has been the difference between survival and failure.
1 Do an analysis of your profits and identify areas where profits and losses are being made. To what extent do you have under-performing branches that are being subsidized by others, or some product lines or customers that are losing you money?
2 Identify your top 5 or 10 major competitors, and do a mystery shopper exercise.
– Gather financial information on their businesses, see what margins they achieve, and what bottom line results they deliver.
– What one thing do they do better than you, and where are you better?
– Based on these ideas, develop three things that you can do to improve your offer to customers.
3 Download and read the full case studies and identify all of the specific actions that you could apply to your business, and develop a plan to adopt and adapt the appropriate ones.
4 Implement that plan.