Cash Flow: Revenue (Actual, Part 3)- Differentiate Products
July 27, 2009, 9:31 pm
Copyright © 2009 Integrated Profitability TM
This is the third article on increasing revenue to improve Cash Flow. The first article in the series covered selling more, the second focusing on pricing opportunities. This article concentrates on tweaking your products and product line to generate opportunities to potentially expand sales, increase prices and/or improve profit margin.
● Differentiating Product offerings
Depending upon your business, you might be able to make small differentiations that naturally encourage customers to buy more. Ever notice at coffee shops and fast food places how the drinks are priced? The small one is priced at $x.xx and then each larger size above is a small fraction higher. How many times do you buy the biggest one because it’s “only 15 cents” more? You don’t need the bigger drink, but it is such a good deal.
Assuming the price of the smallest drink is higher than the cost of the largest drink, this type of pricing makes a lot of sense, for both profitability and especially cash flow. That is: the price of the smallest drink is more than the cost of the beverage in all the sizes. So, if somebody buys the smallest drink, you have the greatest profit margin. If somebody buys the largest drink, you have the greatest cash flow. Either size, you win.
● Differentiating Products by Size and Price
The numbers might look like this:
|
|
Small (1x) |
Medium (1.5x) |
Large (2x) |
2 Big 2 Lift (3x) |
| Price (Revenue) |
$1.50 |
$1.70 |
$1.80 |
$2.15 |
| Cost |
.25 |
.38 |
.50 |
.75 |
| Net Profit/Cash Flow |
$1.25 |
$1.32 |
$1.30 |
$1.40 |
| Profit Margin (%) |
83% |
78% |
72% |
65% |
● Differentiating Products by Features and Price
“Features” in this case could be a number of customer-valued characteristics: operating features, functionality, attractiveness of design, recognized quality.
Create a comparison within your product and service offerings. If you only have one product, there is nothing a prospective buyer can compare it do to gauge its value. If you have two products, of different quality and value to the customer, the buyer has an instant comparison. Depending on what is important to the buyer, and the value-proposition of the pricing, buyers will be better able to make a instantaneous decision, and a purchase, without having to go to your competitors to do their “comparison shopping.”
For example, you might have two versions of your product, one with higher quality and more functionality. The value-proposition is more complex, but because there is more to the product, it has a higher price. Alongside it, there can be a bare-bones, simple but functional, version of the product, with a lower price. Fiddling with the features and the prices of the two products allow for “price/cost” flexibility that can be good for the business.
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 33
Copyright © 2009 Integrated Profitability TM
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[...] on increasing actual revenue to improve your company’s Cash Flow. The last article focused on differentiating products to create opportunities to increase prices or to naturally influence customers toward certain [...]