How To Use Strategic Pricing To Increase Profits
As an entrepreneur, if I asked you why you were in business, I’m willing to bet that your response will be connected to the difference you can make in the world, how passionate you are about what you do, or that you adore the lifestyle working for yourself has allowed you to create.
And the reward you get for being an entrepreneur? It’s that same sense of fulfillment, gratitude and independence. Right?
Kinda.
Those lovely, warm, very valuable rewards for the work you do will keep your heart happy – but if you want to be in business for the long haul, you need to add financial profit into the mix.
What is profit?
At its most basic, profit is the difference between the amount you earn, and what it costs you to run your business.
Revenue – Expenses = Profit.
It’s a simple formula…but can go oh so wrong. Usually because we have blindspots on what our real expenses are.
- The salary you pay yourself? That’s an expense.
- The amount you spend on ecourses and coaching? That’s an expense.
- Wifi, paperclips, planners, and conference fees? Those are all expenses.
Forget those items (or others like them) in your profit calculation and you’ll see some realllllly exciting numbers…but without any corresponding uptick in your bank balance or peace of mind. It’ll be an illusion of prosperity – but a very real sense of frustration and financial panic.
Business isn’t about breaking even
Yes, scrimping and saving to keep your budget in check and your head above water in business is a reality for a lot of us in the early days, but keeping up that routine year after year is tiring. It’ll mean that instead of investing in a new computer, you lose hours tinkering with the old one (or watching that spinning rainbow wheel o’ death go round and round). It’ll mean taking appointments manually, instead of upgrading your scheduling software. It’ll mean never taking a vacation because the thought of giving up even a day of income gives you heartburn and heartache.
That’s really not the sort of existence you were looking to create when you became an entrepreneur…is it?
Profit = Investment = Growth
Even if you’re still in that ‘start up ramen diet’ phase of your business, you can start positioning yourself for strong profits.
It may not be a whole lot at first, but making sure that your profit equation turns up a positive number (even if it’s a small one) right from the beginning means that you’ll be able to build a savings account for your business that will propel future growth.
Why have a savings account for your biz?
- So that when you outgrow your DIY website and need to invest in a developer…you’ve got it covered.
- So that when you’re tackling a big launch and need to cover copywriting, design and hefty deposits up front…you’re not breaking a sweat.
- So that when your pitch to speak at a Big Name conference is accepted and you need to get your keister across the country and onto that stage…you’re not thumbing a ride.
It Starts Here
Building up your profits and your business savings account starts with knowing how much profit you’re earning right now.
Your action this week: calculate your profit margin for each service or product that you sell.
Profit Margin = (Revenue – Expenses) / Revenue
Revenue: How much do you sell each service or product for? (this is the easy part…)
Expenses: What are the costs that go into delivering that product or service?
Don’t forget to include all of the bits and pieces that go into making that product or service possible – right down to the box you send it to customers in, or the Skype credits you use to call your client.
How does that result look to you?
Healthy and positive to the tune of 15% +?
Meager and juuuuust on the right side of that 0% mark?
Languishing with a sad little ‘ – ‘ in front of it?
If you’re not happy with your profit margin, you have two options to change it:
Increase your revenue by raising your prices,
or
Lower your expenses by shaving down your budget.