When it comes to pricing, many entrepreneurs make the mistake of focusing solely on revenue. Higher revenue doesn’t equate to higher profitability in business. When constructing your pricing model, it’s imperative to focus on your bottom line. Giving too much weight to your own top line and bottom-line number may even lead you to lose out on money without even realizing it.
Using a both bottom line figures top-line growth approach, Leslie Bradford-Scott established Walton Wood Farm, a company that offers consciously-crafted and thoughtfully-packaged personal care products. Here are some insights on finding the right pricing strategy for your product or service in business based on Leslie’s CEO journey.
Applying a Bottom-Line Growth Approach to Increase Net Income
High sales figures can make it seem like your marketing strategy is working and generating sales anyway, but it doesn’t translate to how profitable your business is. Analyzing your business growth from another perspective can help you boost profitability.
A top-line growth approach simply addresses your revenue or your gross profit from gross sales in your company's income statement. Alternatively, a bottom-line growth approach takes into account your company's net income after deducting all expenses from your revenue.
Some benefits of the bottom-line approach include:
Determining the correct price for your product or service line by taking into account your expense costs.
Pricing your product sustainably so that it holds up in the supply chain.
Seeing the bigger picture of how your revenue model works, from which you can determine the areas of your business that need improvement.
As Leslie applied to her business:
“The very first thing I'm going to pay attention to is the bottom-line. If I can't make at least 10% profit, then I don't care about the top-line number. Forget the top-line number because what happens is you can be focusing on that and losing money, and you don't even know you're losing money.”
Price For the Future
What is the vision you have for your product and your business? Once you have that figured out, price your products according to the future profit growth you want, rather than settling for a bottom-line price today. In the long run, setting a price for your potential growth can help you gain profitability and sustainability without sacrificing the cost of an ethical product.
"Okay, there's a chance I'm going to build a $100,000 business, maybe it'll be $500,000, maybe it'll be $1 million, maybe it'll be $10 million. Who knows? I don't know that answer. But I am going to build the infrastructure as if it's going to be a $10 million company.”
Knowing Your Overhead Costs
Sometimes business owners underestimate one of the key components of their bottom line– their overhead costs. You have to factor in the time and money it takes to get your product or service to your consumers. For example, Leslie almost went bankrupt because of operating expenses of the warehouse line she contracted for packaging and shipping. It’s essential to know where your business's money is going. Review your revenue and expense accounts.
A future-focused vision toward pricing your product can help you achieve profitability. Remember that every single investment you make goes into your pricing. This can include:
Third-party logistics (3PL)
You can work backward by tracing your costs line from the end product to distribution, to production, and to the investments you made.
“You're paying for boxes, you're paying for packing material, you're paying every time somebody touches something, you're paying for receiving. All of these things have to factor into the costs, and people just don't know how expensive it is.”
Identify and Resolve Process Issues
Don’t be afraid to ask for your help. As a business owner, you are supervising a lot of things when it comes to your company's net earnings. You may be overlooking certain areas of production and distribution, which could be the cause of your issues. It can be intimidating to ask for a professional opinion, but hiring a consultant to go over your procedure, data, and figures can help improve your profitability.
In Leslie’s case, she finally hired a chief financial officer (CFO) after reaching a line of seven-figure revenue–with low profitability.
“If I could change anything, I would have had hired a CFO. I wouldn't be able to afford one for many hours, but I would have had somebody, maybe, just one or two hours a month to make sure I never went off the rails because a lot of those caused problems.”
Understanding the processes in your business and how these pieces come together will show you the complete picture of how you ended up with your revenue growth, net profit, and company's financial performance. It will also enable you to look into consideration operating efficiencies.
From Leslie’s experience, here is how she worked with a part-time CFO:
Review the actual budget and numbers.
Find out where the company went off track and stayed on track.
Ensure that the cost of goods (COGS) is what it should be.
Make decisions on matters like marketing and staffing based on these reports.
As Leslie puts it:
“This is your numbers. These are where your numbers need to be, make sure the numbers are there. If you make sure the numbers are there, you're going to save your company.”
Adapting to Adversity: Walton Wood Farm in the Pandemic
You have to be resilient as a business owner. When the time comes to pivot, you need to be creative about how your product or service can still thrive on the market. Leslie noticed that stores that created all kinds of online models — a combination of Facebook sales, live sales, pickups, and gift boxes, strengthened their sales growth during the pandemic.
People will continue to support your business if they believe in it, even if you have increased the price. During the pandemic, many brands took on higher prices. It’s all about how you market your product for the time being.
“The supply chain got very expensive in terms of shipping, and costs went up, retail costs went up, packaging prices went up, ingredient costs went up. What we did was we just tweaked pricing where we could — we increased our rate.”
Leslie noted that looking at your business’s cash conversion and total revenue cycle can help determine pricing. Walton Wood Farm made most of its sales via credit card, and customers had to pay in advance on accounts receivable.
Advice to Late Bloomers in Business
Even if you are not one of the most profitable companies, it’s never too late to start your business. Leslie started her company when she was 49 years old. She began her business by making homemade bath salts with humorous labels. By approaching local store business owners, she was able to put her various product lines out on the market. Here are some pieces of advice from Leslie’s experience:
1. Asking for Others’ Opinion
When you come up with an idea for new customers, the question to ask is, “Hey, I want you to tell me every single thing that's wrong with this.” People will give you their critical opinion and the truth when you invite them to do so. This prevents those you asked from having to sugarcoat their thoughts on your product.
2. Write Their Opinion
After asking for opinions from your family and friends, write them down and take what you can improve upon to your product or service top and bottom line too. It’s better to ask other people outside of your bubble for their thoughts on your business. The more input you get, the better insight you will have for the business. Leslie thinks of it this way:
“If you ask ten people, and they're saying exactly the same thing, you have a problem.”
3. Put Your Product Out There
Go to your local store, then ask the owner if they can put your product prototypes on the shelf (or for consignment) to see its viability. As Leslie says:
“If it doesn't speak from the shop itself, if it doesn't leave by itself, it's probably not a good idea.”
Like Leslie, as long as you have a strong vision for your product and sheer determination for your business, you can get your business to where you need it to be, despite your age. It’s important to believe in your product or service line and the impact it will have on the community and the world. You will experience difficulties, but there are always ways to overcome them. Remember to know your numbers–including all operating costs, including general and administrative costs–to get the right pricing strategy for profitability
If you want to know if your pricing is right and whether it can lead to your growth, a CFO can help you figure out your next best move. Understand what fair yet competitive pricing entails and how it plays a critical role in your business with the help of a finance team. Schedule a discovery call with Profit Reimagined™ to help you cover your top and bottom lines' foundations and deepen your understanding of these