The world has changed in a short period of time.
It wasn’t long ago that we were confident we could project future business activity and profits with some degree of accuracy. We felt in control.
Now, many feel out of control. How can you make good business decisions when you can’t predict what the demand will be for your products or services next week, let alone next year?
Something beyond your control — the environment — is attempting to control your business and your success. You may not be able to change that environment, but you can’t take a “lets just ride it out” attitude, either.
Work on the internal factors, areas you can control. Reassess how you do things and how to do things better. This can help you regain control and reduce the negative effect of the environment.
Pricing is one of the most important areas the environment has taken control over. No longer can you set prices based on costs plus a healthy dose of overhead and a nice markup. The power of pricing has shifted to the buyer and the competition.
The competition has excess capacity and will sell at any price to keep its factory running or its people busy. The customer knows there is excess capacity and pressures suppliers to lower prices or lose business. This reflects a business owner operating under environmental control.
But it is possible to take back pricing control. This requires a better understanding of your true costs and overhead, and of your company’s competencies. Those who lack this understanding often make poor pricing decisions. They take orders they should have passed on or pass on orders that could have contributed to the bottom line.
Taking back control requires examining the pricing process and determining which products and services are helping and which are hurting. A reassessment of pricing strategy requires:
* A realistic assessment of core competencies. Determine which products and services you are good at producing and which you can never realistically be competitive on without losing money.
* A realistic assessment of the way direct costs and overheads are applied to determine prices. Should every product or service carry the same overhead burden? Products may be charged a disproportionate part of the overhead and your best customers may be paying huge portions of the overhead.
Eliminating products or services may prove the best strategy. Refusing work and reducing gross sales can be discomforting, but you will regain control and maintain profitability. Joel Strom ([email protected]) is director of Joel Strom Associates, LLC, the growth management practice of C&P Advisors LLC. The firm works exclusively with closely held businesses and their ownership, helping them set and achieve growth objectives while maximizing their profitability and value. Contact him at (216) 831-2663.
