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  • We’re in business to make moneyI have worked with many fast growing businesses that have failedWe need to price to drive profits to be sustainableEg Big 4 banks with interest rates
  • Not advocating to cut costs, that’s not what today is aboutAbout managing profits
  • Ask what kind of businesses are in the room
  • Ask the room how they determine profit Define revenue v profitMaking business decisions on what we believe is profit but isn’tBusiness focus on revenue thinking good revenue = a strong businessProfits are more important than revenue Being profitable is having profitable cash flow – but how do we price for this?
  • This may seem basic but too often businesses do not focus on profits or pricing which can lead to failureYou will make different business decision based on what you believe your profits to be
  • Why they can’t pay their ATO debt and have problems with cash flow – cash loss of $253,303If you don’t understand your profit how can you price to be profitable
  • Real question is how much cash do you want to be taking home? Explain profit to income conceptStart with your bottom line and work backwards
  • Working from the bottom upIf you’re always chasing growth in turnover you may never have profit – unsustainable business model
  • between 10-15% is a good margin – depending on your type of businessHigh volume business 5%Service based business 15-20%Gross marginConstruction businesses should aim for a 50% gross margin – too many sitting on 40% and not making profitService businesses – wages should be 40%, fixed costs 30-35%, leaving a profit margin of 15-20%
  • Not here as a marketerMaximise current profit – taking into account revenue and costs. May not be the best objective if it results in lower long-term profits Maximise current revenue – no regard to profit margins. The underlying objective is to maximise long-term profits by increasing market share and lowering costs Maximise quantity – maximise the number of units sold or the number of customers served in order to decrease long-term costs Maximise profit margin – attempts to maximise the unit profit margin, recognising that quantities will be low Quality leadership – use price to signal high quality in an attempt to position the product as a quality leader - Using pricing to target certain clients Partial cost recovery – a business that has other revenue sources may seek only partial cost recovery Survival – in situations as market decline and overcapacity, the goal may be to select a price that will cover costs and permit the business to remain in the market. In this case, survival may take a priority over profits, so the objective is considered temporaryStatus quo – business may seek price stabilisation in order to avoid price wars and maintain a moderate but stable level of profitPeople don’t buy on price – they buy on perceived value
  • Every business should understand their costs - including costs of production Too many businesses don’t price to cover costsgive Harvey Blinds as an example of cost-based pricing
  • Understand the complete value chainThey changed their quoted prices – increased prices by 15% and also looked at ways to streamline production to reduce costsGained profit of $150K an increase of $300K
  • Understanding all the details that go into your end quoted price to ensure you cover costs and end up with a profitgive Regatta as an example of project pricing
  • Devil is in the details – identify the value and whether you can deliver the project profitably Many businesses run risk of under quoting when not doing a cost analysis
  • Relevant in the service sectorGet the client to understand the value of your servicegive ISN as an example of value-based pricing
  • give ISN as an example of value-based pricing
  • Comparative pricing – matching your competitors. Can be dangerous – good for winning sales in the short term but often isn’t sustainable Psychological pricing – base the price on factors such as signals of product quality, popular price points and what the customer perceives to be fair eg $9.99Market penetration pricing – setting the price low to attract customers and gain market share. The price will be raised later once market share is gainedLoss leader – is a product sold at a low price (cost or below cost) to stimulate other profitable sales. Eg supermarketsVersioning – creating a line of products that includes different models including basic (lower quality, off-peak), premium (higher quality, faster, priority service) and tailored (meets customer’s unique needs) differential pricing – Selling the same product to different customers for different prices eg cinema tickets – full price, student price, seniors price eg waterMany more
  • Business owners focus on revenue first then cost – what if you had the mindset of ‘what is my cost base and then assess the revenue needed to cover these costsWhat costs are variable as opposed to what costs are fixed – give examples Activity based costing – explain Use Harvey Blinds example Challenge them to review their P&L - what’s redundant now and what will be redundant in the future – business models are changing
  • understanding the process of incurring cost

Pricing for profit Pricing for profit Presentation Transcript

  • Pricing for Profit Analysing, Determining, Strategising Presented by: Michael Derin, Managing Director, Azure Group2/04/2012 1
  • 2/04/2012 2
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  •  How do you determine your profit? Accepting the P&L Profit isn’t cash flow or revenue What it means to be profitable2/04/2012 4
  • Fee income Residential Domestic - Sales 110,000 110,000 Commercial Development - Sales 307,500 307,500 417,500 417,500Costs of Sales Residential Domestic - Costs 57,500 52% 57,500 52% Residential Domestic - Perm Staff 35,000 84% 35,000 84% Commercial Development - Costs 100,000 33% 55,000 155,000 52% Commercial Development - Perm Staff 95,558 65% 95,558 84% 288,058 343,058Gross Margin 129,442 31% 74,442 18%Fixed costs Accounting 1,885 12,500 14,385 Advertising & Marketing 15,000 12,500 27,500 Bank & Barter Charges 750 750 Bad Debts - 10,000 10,000 Other 43,161 43,161Total Expenses 60,796 15% 95,796 23%Net Profit 68,646 (21,354) 2/04/2012 5
  • Fee income Residential Domestic - Sales 1,250,000 1,202,500 Commercial Development - Sales 2,709,000 (47,500) 2,559,000 3,959,000 (150,000) 3,761,500Costs of Sales Residential Domestic - Costs 625,000 50% 45,000 670,000 56% Residential Domestic - Permanent Staff 388,857 81% 388,857 88% Commercial Development - Costs 1,475,000 55% 55,000 1,530,000 60% Commercial Development - Permanent Staff 691,839 80% 691.839 87% 3,180,696 3,280,969Gross Margin 778,304 20% 480,696 13%Fixed costs Accounting 26,990 12,500 39,490 Advertising & Marketing 53,190 12,500 65,690 Bank & Barter Charges 6,750 6,750 Bad Debts 12,000 10,000 22,000 Other 425,177 425,177Total Expenses 524,107 13% 559,107 15%Net Profit 254,197 (78,303) 2/04/2012 6
  • (75,000 ) 1,127,500 (100,000 ) 2,459,000 3,586,500 670,000 59% 388,857 94% 1,530,000 62% 292,239 91% 3,280,696 305,804 9% 39,490 65,690 6,750 22,000 425,177 559,107 16% (253,303)2/04/2012 7
  • How much profit would you like to be taking home?2/04/2012 8
  • Ideal - lower Ideal - higherIdeal profitability Ideal No profit COGS priceNo# of Widgets 10,500 7,500 9,333 7,500Price of Widget 250 250 250 350 $ $ $ $Income 2,625,000 1,875,000 2,333,333 2,625,000Cost of Sales 1,575,000 60% 1,125,000 60% 1,283,333 55% 1,575,000 60%Gross Margin 1,050,000 750,000 1,050,000 1,050,000Fixed expenses 750,000 750,000 750,000 750,000Profit 300,000 - 300,000 300,000 2/04/2012 9
  •  What’s a good margin for your business? How to measure your margins Things you can do to maximise your margins How discounts and reduced prices impact your margins and your profits2/04/2012 10
  • Discount 95% 90% 80% 12,000 114% 14,000 133% 21,000 280% 237.5 225 200 $ $ $ 2,850,000 3,150,000 4,200,000 1,800,000 60% 2,100,000 60% 3,150,000 60% 1,050,000 1,050,000 1,050,000 750,000 750,000 750,000 300,000 300,000 300,0002/04/2012 11
  • 2/04/2012 12
  •  Maximise current profits Maximise current revenue Maximise quantity of units sold Maximise profit margin Quality leadership Partial cost recovery Survival Status quo2/04/2012 13
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  •  Price is based on the production cost plus the profit margin Critical starting point for many established SMEs Need to get your cost analysis right Eg: ABC Blinds2/04/2012 15
  • ABC Blinds Pty Ltd Cost per Blind Unit Inputs: - Materials 150.00 - Director Labor 75.00 - Overhead allocation per unit 68.75 see below 293.75 Overheads Turnover 1,500,000 Units sold 4,000 Overheads – total 275,000 Overhead per unit 68.75 Pricing is therefore $ 352.50 20% mark up on total costs or Pricing on variable cost is therefore $ 352.50 60% mark up on variable costs2/04/2012 16
  •  Pricing for a project Extension of cost-based pricing Eg: Catering business2/04/2012 17
  • Kiosk Restaurant Catering - Snacks- Catering - Catering - Snacks - Restauran RestaurantTable of Guests Totals % Breakfast Morning Lunch Dinner afternoon t- Lunch - Dinner Attendees Attendance Day 1 - 200 400 - 200 100 - 900 2,000.00 10% Day 2 - 200 400 - 200 100 - 900 2,000.00 10% Day 3 - 200 400 - 200 200 - 1,000 2,000.00 10% Day 4 - 200 400 - 200 200 200 1,200 2,000.00 15% Day 5 250 500 1,000 500 500 500 500 3,750 5,000.00 15% Day 6 500 1,250 2,000 1,000 1,000 1,000 1,000 7,750 10,000.00 20% Day 7 1,000 1,500 2,000 - 1,000 1,000 - 6,500 10,000.00 20% 1,750 4,050 6,600 1,500 3,300 3,100 1,700 22,000 33,000 100% Menu Listing Price Cost Price Cost attendees attendees athletes athletes Beverages Hot beverages $ 2.50 $ 0.50 $ 2.00 $ 0.50 Non alcoholic cold beverages $ 4.00 $ 2.00 $ 3.20 $ 2.00 Alcoholic cold beverages $ 10.00 $ 6.00 $ 8.00 $ 6.00 Water $ 3.00 $ 0.50 $ 2.40 $ 0.50 Attendees Athletes Total Revenue Cost Net Profit Revenue Cost Net Profit Revenue Cost Net Profit Beverages Hot beverages 3,204.25 640.85 2,563.40 1,450.00 362.50 1,087.50 4,654.25 1,003.35 3,650.90 Non alcoholic cold beverages 20,276.00 10,138.00 10,138.00 - - - 20,276.00 10,138.00 10,138.00 Alcoholic cold beverages 14,300.00 8,580.00 5,720.00 - - - 14,300.00 8,580.00 5,720.00 Water 2/04/2012 10,012.50 1,668.75 8,343.75 25,074.00 5,223.75 19,850.25 18 35,086.50 6,892.50 28,194.00 47,792.75 21,027.60 26,765.15 26,524.00 5,586.25 20,937.75 74,316.75 26,613.85 47,702.90
  •  Price based on the effective value to the customer relative to alternative products - ie brand, quality, physical attributes, service, style, ease of purchase Eg: IT Solutions2/04/2012 19
  • IT Solutions Pty Ltd Original price $750/month 9,000 Not profitable Cost per Client for annual licence Inputs: - Materials 25.00 - Director labour 6,600.00 - Overhead allocation per unit 3,466.67 see below 10,091.67 Pricing is therefore $12,110.00 20% mark up on total costs or Pricing on variable cost is 60% mark up on variable therefore $ 12,110.00 costs Value Based pricing Monthly charge $ 1,000.00 up from $750 per month to cover: - IT services and consulting - Data Security management - Any query at any time - Immediate resolving of system down issue Plus on costs, for example System down outside IT service companys control, then: - Hourly charge based on cost recovery of $75 per hour.2/04/2012 20
  •  Comparative Psychological Market penetration Loss leader Versioning Differential2/04/2012 21
  •  Working backwards Variable vs fixed costs Activity-based costing – cost of sales based what goes into delivering the service/product Eg ABC Blinds Are there redundant costs in your P&L?2/04/2012 22
  • Hard costs eg advertising Marketing Costs Soft costs eg people Maintaining existing clients Engaging a client Win client Lose client Systems/operations (sunk cost) Service client (labour) Produce outcomes Invoicing a client Addressing queries Collections Accounting2/04/2012 23
  • SMITH ELECTRICALS PTY LTD JUL AUG SEP OCT NOV DEC JAN FEB MAR APR ANNUALACTUAL RESULTS ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL ACTUAL ACTUALFOR PERIOD ENDED APRIL 2012 Fee income 135,000 186,250 250,000 215,000 200,000 125,000 60,000 90,000 142,000 113,750 1,517,000 Cost of sales 59% 56% 54% 74% 55% 52% 25% 50% 56% 53% Costs 80,000 105,000 135,000 160,000 110,000 65,000 15,000 45,000 80,000 60,500 855,500 Contractors 9,500 6,000 2,500 3,500 6,500 23,750 700 4,000 1,000 7,500 64,950 Perm staff 37,500 36,563 33,500 35,500 35,500 33,500 29,070 27,637 27,637 27,500 323,907 127,000 147,563 171,000 199,000 152,000 122,250 44,770 76,637 108,637 95,500 1,244,357 Gross margin 8,000 38,687 79,000 16,000 48,000 2,750 15,230 13,363 33,363 18,250 272,643 5.93% 20.77% 31.60% 7.44% 24.00% 2.20% 25.38% 14.85% 23.49% 16.04% 17.97% Fixed costs Total expenses 17,450 16,915 19,471 212,102 19,112 20,070 17,102 17,882 19,297 15,425 192,825 Net profit -9,450 21,773 59,529 -5,102 28,888 -26,320 -1,872 -4,520 14,065 2,825 79,817 Fee income schedule No# quotes 89 58 62 65 64 58 53 59 29 58 815 Success rate 59.55% 32.76% 33.87% 78.46% 81.25% 60.34% 54.72% 55.93% 110.34% 60.34% 61% No# orders/month 53 19 21 51 52 35 29 33 32 35 498 Average price of job 2,547 9,737 11,905 4,216 3,846 3,571 2,069 2,727 4,375 3,143 3,035 Total income 135,000 185,000 250,000 215,000 200,000 125,000 60,000 90,000 140,000 110,000 1,510,000 2/04/2012 24
  • Michael Derin mderin@azuregroup.com.au2/04/2012 25