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Who’s Paying More – You or Your Customer?

Aug 8th, 2016

What if I told you that there was a scenario where more customers could actually cause your business to fail? I focus a lot on the value of powerful marketing, distinctive branding and exceptional customer service but the truth is if you don’t have your product or service priced correctly more customers may not actually be a good thing. The hardest part is coming up with your pricing structure in the beginning but even more importantly you have to continually be monitoring all expenses associated with your business. For instance many restaurant owners can easily come up with the average cost in say a cheeseburger but what about the condiments, where does that cost go? Did you factor enough margin for these items to be included in overhead? What if you have an item that the prices varies continually but your menu price is set? What if the price of fish goes up extremely and that piece of fish now costs you $8 and your menu price is $9 for fish with sides? Well now the more customers you have ordering that item the more money you are losing. These may seem like small costs but it is the little things, waste of product, packaging, overlooked expenses that could lead to you paying more for the product than the customer.

To avoid this scenario and ensure that you have priced your product so that more customers is a good thing, here are some best practices to follow.

Track all expenses: If you’re using an accounting software such as QuickBooks make sure your chart of accounts truly represents your expense categories. QuickBooks can be a powerful tool to determine how much you are spending on activities if you are tracking correctly. Even if you aren’t using an accounting software yet you still need to be writing down all expenses and allocating them to a sales source within your business. I mean everything, supplies, salaries, mileage, lunch meetings, shipping…EVERYTHING.  How much does it cost to acquire a new customer? To fulfill an order? To supply a service? These are the questions you need to be able to answer. By tracking every cent going out of your business you will be able to understand what items are profitable in your business and what expenses could be eliminates.

Know your profit margins: If your business has multiple products or services more than likely some items will be more profitable than others. You have to know what items truly make you money. Your staff should also understand this if you are in a retail sales environment. Going back to the restaurant example. One server pushed the filet mignon meal since it was priced at $27 increasing sales, but what if you only made a $5 profit off each steak plate yet made $8 off each pasta plate? Your overall sales may be lower but your profit could be higher. Your staff need to know what products are more profitable for the business and act accordingly. Knowing the answer to this question will help you guide your time and marketing resources.

Know your ROI (return on investment) in marketing: Marketing costs are part of your customer acquisition costs but without knowing the true cost of your product or service it’s hard to know how many customers you need to acquire to have a positive ROI on marketing. If you know your profit is $5 per customer transaction then the $1,000 marketing opportunity must equate to at least 201 customers to have a positive ROI. For instance if you are going to run an ad that cost you $1,000 promoting $25% off you now have to have more than 201 customers from the ad to receive profitability due to the discount.  You have to calculate these dollars in the overall profitability of your product. Don’t get me wrong I know marketing may not translate exactly, as you may now have that customer for life more than making up for the original investment but this is also something you should track. If you have any way of tracking new customer’s “lead source” or “how they heard” in association with your marketing dollars you can then track what marketing outlets not only bring in new customers but have a higher likelihood of bringing in returning customers.

At the end of the day you have to know exactly what each product costs you and what your overhead costs are and make sure your items are priced accordingly. You also have to understand your customer acquisition costs and profit margins to make sure you are guiding behavior within your business towards profitability.