Perhaps you ended up here because your business is looking for a way to increase it profitability or sales volume. The best way to lever your business is by using pricing.
Whichever way you look at it, you can directly improve your cash flow and increase your business’ profits or value by levering your business. Especially if you take time to appreciate your business’ pricing performance.
Oftentimes, businesses primarily focus on sales volume and try to sell more, but a great business lever is well beyond that. It encompasses a myriad of strategies which optimizes from every part of your business and your customer journey.
What Is a Business Lever?
A business lever, or a lever in business, is an initiative that can help you multiply inputs or provide leverage to achieve faster outputs when applied to any challenges in business. It can be likened to a physical lever that can help you move a large object when you apply a little force.
Typically there are seven levers in a business: volume, pricing, cost of goods sold, reducing overheads, reducing debtor days, reducing stock days, and increasing creditor days.
The first four levers have a primary focus on your profit and loss and a direct impact on the profitability and cash flow of your business. They also have a great impact on your business value, brand, customer base, income streams, and internal expertise.
The last three levers are focused on your balance sheet, and they are collectively called working capital. They have a huge impact on your cash flow and funding requirements.
Pricing as the Most Powerful Business Lever
Pricing is undoubtedly your most powerful lever because it can help you increase profits quickly and in the long run too.
If you have a gross margin of 10%, you can raise your prices by 1% and increase your profit by 10%.
One good thing about pricing is that for most businesses you can implement price changes pretty quickly, with the changes influencing buyer decisions dramatically.
However, business owners are always afraid of losing customers if they raise prices, but this fear is unfounded.
In order to lever your business through pricing that works, you need to know your customers willingness to pay. When you have this you can also compare them to your break-even points by looking at your margins by product, service stream, and customer so you know which sales make money for you and which don’t.
But a good pricing lever is determined by a data driven pricing strategy that measures your customers willingness to pay in real time.
The result of the pricing analysis should therefore fit well with your sales and marketing plan.
Why Most Companies Underemphasize Pricing
Companies need to emphasize pricing in order to increase profits, but most of them don’t.
They underemphasize pricing for the following reasons: uncertainty, conflicting influences, and the status quo.
Uncertainty
The main reason most companies underemphasize pricing is that they don’t know the right price to charge. Instead, these companies try to reduce costs.
However, companies with a good understanding of how buyers perceive value get much closer to ideal pricing by using value-based pricing, a profit-maximizing pricing strategy, to charge customers what they are willing to pay.
Unfortunately, this strategy is ineffective because every customer is different.
As a result, most successful businesses use price segmentation techniques to identify customers who are willing to pay more to do so.
Although this is still an imperfect strategy, it captures the market’s willingness to pay even better.
Conflicting Influences
Another reason companies underemphasize pricing is conflicting influences.
Everybody may have a different opinion when it comes to pricing because no one knows exactly what to do. For example, the finance and accounting team may opt for cost-plus pricing, the sales team may push for lower prices, and the product team may have a preference for higher prices.
The Status Quo
The last reason companies underemphasize pricing is the issue of the status quo. This is because getting the different departments to implement a new pricing strategy can be quite challenging, often forcing them to remain where they are.
You need to convince the salespeople about the new strategy and even teach them how to use it. The IT team may be unable to execute it. You may also have to tweak your products, packaging, and billing system to align with the new strategy.
Price changes can prove a difficult task for many companies due to the reasons above, but a well-executed pricing strategy can be highly profitable.
How to Lever Your Business Using Pricing
Priceagent is a cutting-edge pricing strategy software that helps you lever your business through pricing by identifying your product features and market segments with a higher willingness to pay. The software ensures high-quality, unique, and accurate research with a quick turnaround time of just 24 hours, as opposed to a more extended period of time, say, six months or more, wasted by large consultancies that conduct similar research for large companies even at exorbitant prices.
What makes the software stand out is its fast and vast reach, accuracy, and unique graphs. Try it today.
If you are interested and want to know more, please contact feel free to reach out!