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  • Morris Kaplan
    Smarter Writer

    Morris Kaplan is a former finance and venture capitalist who writes for entrepreneurs and professional services firms

    Morris Kaplan
    Smarter Writer

    Morris Kaplan is a former finance and venture capitalist who writes for entrepreneurs and professional services firms

    In this increasingly competitive environment, businesses are increasingly on the search for ways to increase profit margins. Here are two simple but effective strategies to help you pocket more of your hard earned cash.

    Thomas Friedman, columnist at The New York Times, famously said that we are a “flat earth”, meaning that in an age of global trade and technology that reaches all corners, there are fewer real barriers now than in the pre-internet era. 

    This has been massively exploited by the Chinese e-commerce siteAlibaba which has demonstrated effectively how costs can be taken out of the manufacturing process. So how does this inform business owners seeking to increase their margins? One way is to reduce fixed costs, and another is in pricing.

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    Fixed costs

    When you review your fixed costs you need to evaluate what you get for your spend and whether there is a better, cheaper way to achieve the same or better result.

    Questions to ask yourself

    1. Is this cost necessary to my business?
    2. Is there another alternative that may have a lower cost without negatively impacting from my ability to provide the same level or quality of service?
    3. If I could reduce this cost, would the reduction in cost be less than the reduction in profit?

    So in a flat earth, can contractors replace some fixed costs as far as payroll? A typical transport-logistics today can use cloud-based ERM systems to optimise schedules and thus reduce their fixed cost load (number of vehicles etc). Contractors can help you maintain or increase the level of service provide so employees can concentrate on tasks that require their core skills.

    Pricing

    The concept of pricing according to what the market will bear is inevitably about following prices leaders. Depending on the industry you’re in, a competitor comparison could give you an indication of a market-acceptable price range. But remember, ultimately, you are not in business to match your competitors’ prices. You are there to provide the best value to your customers at a healthy margin for your business.

    There is no doubt that some customers think only in terms of price, yet studies indicate that product and price are the reason that people change from one business to another in just a small percentage of cases. The fact is that price is only the most important factor when all other things are perceived to be equal.

    How to set a value-based price

    Going back to Thomas Friedman, a connected world allows price testing to be a feasible strategy for most businesses. There is also little doubt that some business owners – particularly professional service firms – are reluctant to charge a price that would yield higher margins for fear of losing the client. Many small business owners operate from this paradigm.

    Selling a value proposition is bandied around a lot. There is nothing wrong with speaking to a prospect about price.  By having an in-depth conversation with prospects about what they’re trying to achieve and really listening to their goals, you can set value-based prices that are higher for you and also deliver more for the client, ideally, offering clients a menu of options to help them reach their objectives, and you, your margins. And it beats the hourly-billing mindset.

    Selling hours creates a conflict of interest; it puts you and the client on opposite sides of the table. If you’re selling hours, it’s in your best interest to take longer, to bill more hours. The fact is clients don’t care about your costs. They care about the value you create for them, so that’s what you should be asking them to pay for.

    Ways to increase your bottom line

    1. Handle clients that push back against the idea of paying for value
    2. Ensure that your skills are broad enough to meet the client’s fundamental objectives
    3. Have a strategy to price small jobs and routine maintenance

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