Pricing Mistakes that can Slow Down Sales

Pricing your product is just as important as your marketing plan. In fact, without the right price you could see all of your hard efforts of your marketing collapse around you. Not only can solid pricing turn your account books from red to black, but it can also help engender strong customer loyalty.

You should know what it costs to make what you're selling and get it to your customer. How you determine the price on top of those hard costs could be the make or break of your business.

Here are some common pricing mistakes that can slow down your sales or even bring them to a screeching halt!

Pricing without a strategy.

Your pricing strategy should always support your company’s marketing and operational goals. If you’re holding a discount promotion on a product at below cost, make sure that you can upsell your customer so you make a profit down the road. Likewise, price raises can only work if the customer feels that they are getting a lot of value from your company. A good pricing strategy should allow your products to be sold, with long-term profitability goals in mind and also being competitive. 

De-valuing your service or product.

Underselling is just as bad as overselling when it comes to pricing. You might know down to the penny what an object costs to manufacture and deliver but what about all the other costs associated with selling that product? What does it cost for you to hire a staff, rent a space and market that product? Those line items should all be factored into your price point. Remember you're hoping for volume sales to amortize all of those overhead costs.

Chasing your competitors.

If you're constantly matching your prices to your closest competitors you could be doing a disservice to your business. Unless you're aware of the same overhead and manufacture costs your competitor is applying to their products, their pricing is meaningless. Yes, you should keep an eye on the competition and make appropriate adjustments but don't let that be the total basis for your pricing structure. This issue also comes into play if your slash a price to beat a competitor. In the short run you might get a decent sales bump but those figures could be misleading if those customers won't be coming back for repeat business because they're out looking for the next cheap bargain. Always think of the long game.

Drastic price drops.

Yes, everyone wants to pay a fair price for a product or service. However, if you find yourself dramatically dropping your price for a particular customer they might think they were paying too much for that product to begin with. You don't want to alienate your customers with your drastic pricing policy.

Predicting Accurate Sales Revenue for your Business Plan

 

Your business plan is your calling card. This is how you’ll be judged by potential investors and lending institutions. It has to be expertly prepared and you need to be able to stand by every projection.

The key word there is “projection.” For all practical purposes, you’re making an estimate as to how your business will perform. In the real world, those numbers can go up and down.

Predicting accurate sales revenues could make all the difference with your potential investor. Those numbers have to be realistic and rock solid. Here are the steps to take for making accurate sales predictions.

 

Step 1: Expenses

You’ll need to put together the list of fixed and variable expenses. These will include all the items you know you’ll be paying out for on a regular basis such as office rent, equipment rent, payroll, electric, phone and inventory (if applicable). You should also factor in the budget for marketing campaigns. It proves you’re being realistic about your business expenditures.

Step 2: Income

Here is where you’ll be doing the bulwark of your predicting. How can you estimate revenue when you haven’t sold your product or service yet? One approach would be to analyze the competition. What kind of business have they done in the past several quarters? If they are a public company you can find that information easily.

You might also have experience from a previous job that can provide projected sales figures. Your local Small Business Administration or Chamber of Commerce might also be able to help you.  

You should also analyze your own market. This is easier with a brick and mortar type of store than with an ecommerce business. Think of your business as a zone that attracts potential customers. What would be the average amount of customers who would visit your store or site each day? Of that number, what percentage would make actual purchases? Of that number, how much would they spend? This is how you shape projections. You should always strive to be conservative with those estimates so as not to over inflate your company’s value.

Step 3: Do the Calculations

Here the math is simple: You subtract your expenses from your sales projections. That is your profit margin and it’s the number your investors will be most interested in.

Whatever set of numbers you put into your plan you’ll need to make sure you’ve got backups for them. This can actually be explained as part of your business plan but it’s a guarantee you’ll be asked at some point, “How did you come by these figures?” You want to make sure you have a responsible answer.

How to Valuate Your Business

There comes a time for many businesses when it may be necessary to find investors or a buyer. In either case, it will be imperative to assess the value of your business. Long before you approach a potential investor or buyer, you need to know exactly where the negotiations will begin.

Valuating a business is by no means an exact science. There are several common methods that can be employed. Each method uses different assumptions and, logically, each method will result in a different value. Obviously, part of the negotiation will involve agreeing upon the method employed to determine the business' worth.

Many investors prefer the Discounted Cash Flow method to determine the value of the business. It is based on future cash flows. By employing this method, the investor can see a projection of the actual cash that will come to the company and thus determine the investor's return on investment. A similar method is determining the Going Concern Value. This method compares the current investment to future cash inflows. The revenues of previous years are used to project future revenues, on the assumption that the revenues will not change drastically.

Another common method to determine the value of a company is based on assets. A determination of the book value of the company is quite straightforward. The company's net worth, or shareholders' equity, is determined based on the financial statements of the company. Quite simply, subtract liabilities from gross assets and the result is the net worth or book value.

A similar method is determining the liquidation value of the company, based on the company's assets. This method calculates the income from the sale of all the company's assets. The assumption is that equipment and land would be sold at a price close to their market value. Inventory and receivables generally yield a reduced value. A liquidation value is generally employed for the sale of a business, rather than investment purposes.

Whichever method you use, it is best to consult with a professional advisor who can help avoid mistakes that could prove costly.

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