KPIs prove the power of high-price strategies

Dan Gordon, CPA

In a world of cutthroat competition, it’s tempting to think the key to success lies in undercutting your rivals and being the cheapest option. However, this approach is a race to the bottom.

The other day, one of my clients told me a competitor was bidding on a large account against him. He wanted to know how low he could go in terms of pricing to win the contract.

Plan for profits

While I’ve heard this many times before, and we always emphasize selling value, the reality is certain customers always will take the cheapest option. As an entrepreneur, I realize it is counterintuitive to not take on new business. But I would add a caveat to that by saying you always want to take on new business on your terms, which includes congruency with your profit objectives.

Low-balling may boost sales, but it also will lead to a damaging cycle of eroding profits and brand devaluation. A strategic focus on selling at higher prices, when executed correctly, will yield better financial results.

Let’s look at the numbers, as they don’t lie:

Immediate key performance indicator (KPI) betterment by selling at premium pricing:

• Gross profit margin: (Revenue – Cost of Goods Sold)/Revenue. This reflects profitability at the basic production level.
• Operating profit margin: (Revenue – Operating Expenses)/Revenue. This broader view includes overhead costs, demonstrating business efficiency.
• Net profit margin: (Revenue – All Expenses)/Revenue. This is the overall profitability “left over” after all costs.
  Higher prices boost all these margins, especially if production costs don’t increase in proportion.

Longer-term KPI betterment by selling at premium pricing:

• Customer lifetime value: How much revenue does a single customer generate for your business over your entire relationship? High-value customers are attracted to superior offerings and are more likely to be repeat buyers, increasing their lifetime value. Action point: Focus on quality over the cheapest price point to dramatically increase customer lifetime value.
• Customer acquisition cost: What is your cost of acquiring a new customer? Premium products and services often appeal to a niche audience. This allows for targeted marketing and sales efforts, which can lower your acquisition cost as a percentage of revenue. Example: My cost per sale is $100. If my sale price is $400, then my cost per acquisition is 25 percent. If my sale price is $500, then my cost per acquisition is 20 percent. Action point: Increase your prices; lower your cost per acquisition.
• Return on investment (ROI): This measures the efficiency of any investment. Investing in creating a premium value proposition (through superior product development, marketing, branding, etc.) generates a return over time. High-price models allow for greater investment for more ROI potential, compared to the razor-thin margins of budget options. Action point: If you are willing to accept a low ROI, stick your money in the bank or buy treasury bills. Rates are currently about 4 percent to 5 percent and are a lot less risky than being in business. Best-in-class pest management professionals earn 20 percent or better to ownership. If you take the risk of being in business, don’t work on razor-thin margins. There are much easier and less risky alternatives to earning a lower ROI.

Stay focused

While price-sensitive shoppers always will exist, breaking free from price wars can be a lucrative and sustainable strategy. By focusing on value, differentiating yourself, and delivering an exceptional customer experience, you can proudly sell at higher prices than your competitors — and build a more resilient and successful business.

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from Pest Management Professional https://www.mypmp.net/2024/05/21/kpis-prove-the-power-of-high-price-strategies/
Sacramento CA