No margin for error |
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Maintaining a healthy profit needs to be about more than just raising prices. |
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Who knew turning a profit could be a problem? Corporate Australia has been in the firing line this year for making too much money. |
In February, former head of the Australian Competition and Consumer Commission Allan Fels prepared a report on price gouging and unfair pricing practices for the Australian Council of Trade Unions*, declaring: "Australians are paying prices too high, too often, and the cause is weak and ineffective competition." |
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While SMEs are in a different league to corporates, the negative public sentiment about rising costs has many business owners wary of pulling the price lever. |
Fortunately, there are many other options when it comes to maintaining or even increasing profit margins that don't involve raising prices and potentially putting customers offside, according to Dr Jana Matthews, a Growth Expert at the University of South Australia. |
Founding director of the University's Australian Centre for Business Growth, and an international expert on entrepreneurship, Dr Matthews is emphatic that profit is not the problem - it's the solution. |
"Profit is not a dirty word. Profits are essential. Most business owners we work with reinvest their profits in their companies. Those profits enable them to hire more people, buy more trucks, expand to new locations, and pay the higher prices suppliers are charging them. If we want more people to take the risk of starting a company and employing people, we need to teach them how to be profitable," Dr Matthews says. |
The problem is that too many people link profit directly to price, when it should be linked to productivity. |
"Frankly, there are several things company leaders and owners can do to be more profitable - and raising prices is last on my list," she says. |
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Profit drivers |
Here are five things Dr Matthews says leaders and owners can do to be more profitable |
1. Clarify the company's mission, values and vision- Develop a three-to-five-year plan to achieve the vision and communicate that to all employees.
- Make decisions consistent with the vision.
- Hire people who are high performers and fit the company's values.
- Delegate, communicate and create a culture of high-performance execution.
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2. Reduce costs and expenses- Renegotiate deals with suppliers and explore alternative options and supply chains.
- Focus on working more efficiently. She says: "Ask your team, 'Which steps in our processes could be eliminated? Which reports are no longer needed? How can we integrate our IT systems? How can we use AI solutions to minimise paperwork? What check-lists would reduce errors?'."
- Set realistic budgets and hold people accountable for achieving goals on time and within budget.
- Optimise cash flow. "Happiness is a positive cash flow and cash sooner is better than cash later," she says. For example, use mobile payments, instant payment platforms, shorten payment terms, offer discounts for early payment, and consider progress payments.
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3. Sell more- Sell more to your existing clients and encourage them to purchase at regular intervals.
- Increase sales by targeting new demographics.
- Look for export or online opportunities.
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4. Increase productivity- Focus on employee training and development to boost engagement and productivity.
- Invest in solutions to streamline processes and workflows. Take advantage of tech-based self-service solutions, for example online booking and ordering forms, table-based ordering apps commonly used at hospitality venues, and self-service check-outs. These solutions can enhance customer experience as well as reduce staff costs - a double win.
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5. Raise prices |
"There are many things a company owner can do to increase profit before we get to 'raise the price' to the customer," Dr Matthews says. "But if they have done all those things and they still cannot keep the business going without a price increase, then - for the good of the company and the employees - the owner will need to raise prices. |
"But be upfront about changes, explain why and emphasise the value being delivered to the customer. Consumers are willing to pay for value, but if they believe, perceive or are actually receiving less value - at the same or higher prices - and if reasonable, credible explanations are not provided or don't make sense, then customers will feel ripped off and will be angry." |
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Pricing and payment innovation |
There's no single best way to set prices, Dr Matthews says. Many businesses use cost-based pricing, which adds a fixed percentage on top of actual costs. However, more innovative payment and pricing strategies may allow businesses greater flexibility to adjust margins. They include: - Tiered pricing: Most seen in travel or entertainment for premium, standard and budget seating. Also used for a broader range of products or services to allow consumers to choose between budget or premium options with different input costs to the business.
- Dynamic pricing: This is when prices rise or fall in response to market conditions, such as consumer demand or competitor pricing. Surge pricing, used by Uber, is a form of dynamic pricing in response to demand, while Amazon uses powerful AI to monitor competitors and adjust prices. In the late 1990s Coca-Cola experimented unsuccessfully with a vending machine that raised prices in hotter weather, and more recently, US fast food chain Wendy's announced it would begin exploring dynamic pricing opportunities. The chain stressed the focus was on lowering prices during slow periods to lift overall sales, rather than hiking during peak demand.
- Subscription or membership pricing: Originally the domain of media companies and gyms, memberships and subscriptions have now been expanded to businesses as diverse as plumbers and florists.
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The bottom line is business needs to make a profit. "Otherwise, they will go out of business and our economy will suffer. But there are many things a business owner can do to be profitable that do not require price increases," Dr Matthews says. |
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The information provided in this article is specific to the particular situation described and individual experiences and results may vary. Past performance is not an indication of future performance and no representation or warranty is made that the information contained above is appropriate for any particular circumstances or indicates that a particular course of action should be followed. |
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Please note, we do not provide tax, legal or accounting advice. This article has been written for general informational purposes only and is not intended to provide, and should not be relied on, for tax, legal or accounting advice. We encourage you to consult your own tax, legal and accounting advisors before engaging in any transaction. |
