The Key to Profitability: Customer Value
Having trouble turning a profit? Consider a new point of view.
Many of the business owners we work with have a hard time wrapping their head around how to convince their customers to pay the higher prices required to achieve profitability. We’ve found that the first step to profitability is changing your mindset and gaining a better understanding of what you’re really selling. Don’t sell a product or service. Sell the customer value, a.k.a the beneficial end result that your product or service has on the customer’s life.
Because we are all so involved with what’s happening behind the scenes, often we think of what we do in terms of cost. Many businesses price their offerings accordingly, which makes profit seem unattainable. Cost is the combined expense of the raw materials, labor, and business operating expenses (marketing, sales, rent, equipment, etc) required to deliver a service or product.
People with a cost mindset can’t imagine consumers would pay much more than the production costs of their product or service, so they charge just enough to breakeven year after year. The people talk about what they do.
“I fix air conditioners.”
“I design molds for plastic injection manufacturing.”
“I write content for an educational website.”
“I teach Pilates.”
“I sell clothing.”
Customer value, on the other hand, is what something is worth to a consumer, irregardless of its cost. Think of it as the end result. Value is incredibly important because it’s what makes profit possible. And profit is what will allow you to keep doing what you love, employ people you trust, serve more customers, become a real CEO, access a better quality of life, save for an excellent retirement, take vacations, make investments and maybe even sell your business when you’re ready to move on.
Take pencils as an example. Because of economies of scale, a pencil only costs a few cents to manufacture. They are easy to transport in mass quantities, so the shipping costs are also low. If you’re an office supply retailer, you can eek out a few cents profit by retailing it for 10 cents to professionals who will use it to take notes before recording them on a computer. However, if you positioned your shop to appeal to artists, who won’t settle for your average pencil to make their next masterpiece, you could sell a higher quality pencil that costs 40 cents to manufacture and retail it for $3-5. Your profit margin just skyrocketed because making a masterpiece possible is much more valuable than taking a few notes during a meeting.
People with a value mindset think about the positive impact they can make on a customer’s life and price their offerings based on how much that impact is worth to that customer. As a result, value minded companies are often able to make a sizeable profit margin, which enables them to expand and positively impact even more lives. These people talk about how they improve people’s lives.
“I save people from heat waves within 2 hours of their initial service call.”
“I make it possible for you to enjoy music in your car radio for the entire life of your car.”
“I help people get their next promotion on their own timeline and at an affordable price.”
“I make all those aches and pains go away with convenient online booking and flexible scheduling.”
“I make professionals feel confident for their next big meeting.”
Of course customer value and profit margins are also dependent on other factors. Industry forces like the power of competitors, customers, and suppliers directly impact profit margins so even the best players in your industry can only charge so much. We recommend doing some research to see what the average profit margin is in your industry, so you can set realistic and competitive goals.
The danger some businesses encounter with value and profit is greed. There are cases where the sky is almost the limit in terms of how much you can charge. New York real estate anyone?! Or anyone remember Valiant who hiked up the prices of medicine over 700% per pill? Just because you could charge that much doesn’t mean you should. In our opinion, value shouldn’t undermine trust or the belief that you’ve got your customer’s best interests at heart. It’s just bad business to force people to pay exorbitant prices for something they really need and value. And it will eventually come back to ruin you. Industries change and someone always figures out a better way to do what you do. Before you know it, you’ve lost your customer base and you have to take drastic measures, like launching a price war, to get them back.
At WeLocals, we’ve developed a process to determine the customer value you should deliver to your target markets and we improve businesses by implementing the systems and processes required to deliver that value. If you’re ready to increase your profit margins by delivering customer value, then learn more about our Level Up program.