Cover your costs so your profit margins don’t evaporate.
By Susan Conner
Yes, you make money because you understand your customer, and you create a good perception to create value. But what do your customers always ask about? The price.
The other P’s (product, place and promotion) accrue costs that hopefully create value. The price should recapture this value. Yet, many sign companies adopt simple “rules of thumb” as their pricing strategies, because those prices have kept them in business, and, rather than apply for a CPA license, they’d like to spend most of their time creating good signage.
What do flourishing sign companies always ask about? The costs. They set a selling price that covers production or wholesale costs, freight charges, a share of overhead (fixed and variable operating expenses) and a reasonable profit. Other cost factors, such as insurance rates; shrinkage (wasted materials and mistakes); seasonality; shifts in wholesale or raw material prices; and sales or discounts affect pricing. Also, some costs – capitalized as assets – such as startup costs, equipment and improvements, can be amortized.
In a downturn, small businesses are tempted to knock down the price to win a sale. Don’t cave in. Set a firm line based on solid business tactics, not on negotiating skills. Never compete on price alone. If you do, your profit margins will be slashed by ever-mounting costs. Even if you do make a slight profit, you’ll smolder with resentment for working so hard for so little.
At the other extreme, avoid the “coffin corner of costing,” where CPA-like tunnel vision values capacity production rather than high value. Price cutting signals customers that you‘re an easy prey for additional discounting. And it may cloud your brand‘s hard-won image.
Instead of trying to please all people in all ways, specialists who build a strong reputation as, say, gilders, focus on the market segment they serve best. Their business-management plans involve budgets, but they aren’t based solely on costs.
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