Welcome back
I teach sales teams how to sell their products and services effectively and with a common language, but I am often asked what percentage is a good profit margin to make for my product / service. More importantly they want to know how much they should make with their product and service. Some even believe that their product / service is earth shattering brand new, and nothing like it anywhere on this planet so there is nothing to compare it against.
The first thing that I ask them is what is the market bearing for a sales price for what they offer. Often, I am left with a blank stare saying our price. This is because they really have not studied the market to understand. When we do some investigating, we find out that a market study to see what the competition is offering their eyes open. Old pricing strategies was to add profit to our costs. They called it cost plus for markup.
Different markets bear different profit margins so investigation is necessary. Grocery stores operate at much lower profit margins than say Apple selling an iphone. They have more turns of products such as chips, fruit, milk, etc that they do not need to charge $20 per banana. They also understand their costs well.
By understanding the market, we can now understand this data point. The real estate industry has done a great job understanding this topic and we can learn from them in other markets. They literally show comparable sales in the area “Comps.” It’s a really good gauge at where the market is for a product / service.
Unfortunately, some market pricing is established in markets by trying to simply add profit to costs. This is called a cost plus pricing model and is unfortunately not viable in most markets. We really need to know what our costs, but can not just simply say we deserve x profit.
Now we need to really understand our costs. There are many costs like material, labor costs, but fixed costs like the rent of our buildings, loan payments (if you don’t follow Dave Ramsey’s rules), etc. are also needed to be figured in. Once we understand our true costs, we need to know how much we need to make before we can brake even, and then how we can survive and have a decent living. That’s right we need to understand where we can be so that we can still eat and sleep in doors with possibly a vacation…I mean retreat for future planning ;)
Now here is a warning especially if we are launching a new product / service, or are new to any market. Trying to come in and be the cheapest price is not the answer to have instant success. Most will try to do this and believe that they will be able to increase price over time whether it is scope creek to add profit, or simply raising price over time. What organizations have found is that when they try to raise price for future business, it tends not to work because they have set a precedence with the customer. Focus on starting off right and not being the cheapest price.
Be the best value. This is where there is so much value that the customer has no reason not to do business with us and pay the investment to work with us. That is where top organizations that have high profits, large cash reserves, and can weather any storm are. They are financially set for success and their customers are happy to pay the investment to do business with them.
Use the sales process to understand what value you bring to the customer and you’ll be able to maintain good profits.
Sincerely,
Kevin Sidebottom
“Businesses wonder why the majority of their sales teams struggle at winning profitable business. I teach your sales team to walk with the customer through the five buying decisions, and in the correct order to generate more sales with high margins!”