Cash Flow: Revenue (Actual, Part 2)- Increase Prices
July 23, 2009, 3:29 pm
Copyright © 2009 Integrated Profitability TM
This is the second article devoted to improving Cash Flow by increasing actual revenue, as opposed to merely adjusting the timing of revenue. The last article of this series covered increasing sales.
Revenue consists of two pieces:
1) a unit of something (e.g., a product, a service, a period of time)
multiplied by
2) a price
The previous article concentrated on increasing the number of units; this article focuses on increasing prices to improve Cash Flow.
● Increase prices
Every business, market, product/service suite and customer base is different. The ability to increase prices is dependent upon many relative characteristics across all four areas, and how they, at the current moment, are interconnected. For example, who has relative market leverage: buyers or the seller? If you have leverage, there is a better chance you will be able to increase prices, without causing a more-than-offsetting decrease in sales. If not, you don’t.
More importantly, where is your product/service placed in the range of similar offering? How is it perceived by the market? If it is one of high quality, then prices may be able to be increased. If you know that your product and service is the best quality and value in the market, but your customers don’t know it, then you have some marketing homework to do. In order for someone to pay a higher price, he or she most perceive that the product/service is better and deserves the premium.
How does your product/service compare to the competition?
Not only to current competitors, but the up & coming ones as well? Again, if your offering is by and away the best, prices may be increased.
Over the long-haul, as long as your products are (or are perceived as) the best, you ought to be able to charge a premium price relative to the rest of the market. If they are not, then you either focus on the expense side to make sure you are the low cost provider, or you focus on increasing the quality and desirability of your product so that, eventually, you will be able to price for the premium aspects of your product.
Aside for the product itself (its features and functionality), how does your supporting service compare to the market? Are you easy to find, a pleasure to deal with, convenient to buy from? If so, then customers may be willing to pay a little higher price.
(Note: the art and science of pricing is beyond the scope of this article, but where you set your price needs to take into consideration the tactical and strategic direction of your company. In other words, you might be able to increase prices right now, with a nice impact on current cash flow, but if a price increase scuttles a strategic marketing objective, you might not want to do it. Your long-term profitability might dictate that you postpone the price increase until your market share and reputation have grown more).
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 32
Copyright © 2009 Integrated Profitability TM
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