Pricing Strategy: Why You Should Never Race for the Bottom
Updated: Jun 1, 2022
How do you make money? A revenue model can give you unique insights into your business’ income and profitability.
A revenue model provides an understanding of the value of your products and services. It gives you a framework for pricing this value, offering it to others, and generating revenue. As a critical business model component, the revenue model is vital for budding businesses in their success or failure. Maintaining and growing your business becomes a struggle if you don't have a clear picture of your revenue stream.
Bootstrapping: Investing in Yourself
Most entrepreneurs are problem solvers. You made your innovations, ideas, products, and services with a problem in mind and the goal of solving it. However, that doesn't always mean the world is ready to invest in you. Budding businesses often need the capital to refine, produce and market their products. Usually, creating your ideal product with great value can take time and money.
Bootstrapping means making use of your already existing resources. As you start your company, your funds could be limited. Making good use of your current resources allows you to kickstart your production. As you profit from your initial sales, invest what you have made back into your business. Utilize this revenue stream for your new resources to once again produce, market, and profit.
The market isn't always ready for your innovations; it takes time to generate large amounts of revenue. To quote Toni:
“Good ideas do not become viable until they intersect with a ready market. You can fight as long as you want, but a good idea and a ready market are when products take off.”
Continue to invest in yourself and build sustainability.
Pricing Right: Establishing a Good Profit Margin
As the business owner, you know the value proposition of your product. Giving a price to your product's value can be challenging, especially when establishing a revenue stream. The right price can cover your costs while adding a profit margin. Keep in mind the following as you determine your profit margin:
Sustainability of your business
Possible future retail partners
Possible future distributors
Possible future building of production facilities
One key thing Toni considered was her Abeego's scalability. You can do the same. Allowing for a profit margin for future partners and facilities allows you to improve and grow your company. You can find yourself in a more sustainable and stable position in the long run.
However, long-term stability might mean that your company will grow slowly and organically. Generating revenue this way needs a careful regular review of your financial information. A tip is to keep an eye on your cash flow projection and review your balance sheets to help you through the initial slow start and help you plan for possible financial problems.
It can cost a lot to start a business. It requires a significant investment from you as the business owner. However, as you understand your business's processes more, you can streamline them; tweak your production to become less costly and more sustainable. As less of your finances go towards production, you can use it to scale up your business with partnerships and growth opportunities.
Race to the Bottom: Staying True To Your Price
A race to the bottom occurs when companies compete in the market to gain an edge against the other. They often cut corners, sacrificing the quality of their product. Eventually, the shortcuts and price drops lead to an unsustainable business. Toni firmly doesn't believe in this state of competition, especially for Abeego.
“I had the courage to not race to the bottom because of the exact words -- race to the bottom. When you get to the bottom, it's the bottom. I don't want to be at the bottom; it just doesn't make sense for me.”
Toni understands the value proposition that her unique product brings to consumers and doesn’t undersell it. Build your branding instead of cutting corners and sacrificing quality to compete with other products. You know the value of your product. Spread the message of what you can offer and build your value proposition.
Building a Solid Foundation: Toni’s Financial Downs
Once you have the funds for your business, you face a critical decision- what will you use them for? Toni faced this dilemma in 2014 when she was able to receive funding in the form of consulting services from The Young Entrepreneurship Contest. She was able to take out a loan and decided to expand Abeego. This choice led to her first financial pitfall.
Taking it slow in business means not rushing to expand and sell more and more.
As Toni later realized,
“I think what's really important is that you make sure that you have a really strong foundation to leap off from.”
First, lay down a solid foundation before looking into growing your company. Reevaluate and identify what you can tweak to become more efficient. Take a look at these two foundational components of your business to keep in mind.
Production tools and process
Inefficiency and problems within the foundation can destabilize your business. You can identify the bottleneck and direct your resources towards its improvement, strengthening the foundation of your business. Once you have laid the groundwork, expansion and growth can be within your reach.
Fortunately, Toni could mitigate the problems arising from her financial pitfall. By regularly reviewing your financial processes, you can develop a clear image of your cash flow. Be prepared to respond to possible cliffs in your cash flow projection. Like what happened to Toni, this can ultimately save your company.
Finding the Right Balance: Toni’s Financial Ups
A year after winning the Young Entrepreneurship Contest, Toni was able to be part of SheEO. SheEO is a funding model aimed to encourage and support female-led businesses that tackle the world's To-Do List. With 7000 plus activators, this worldwide initiative provides women and non-binary entrepreneurs with resources. In 2015, Toni was one of five whose ventures received support through a zero-interest loan.
The balance between what you need and what you can afford is a fine line. When faced with the opportunity to receive a considerable sum, it's tempting to say yes. However, you must consider two important things when taking on debt.
How much money do you need?
How much debt can you afford?
These two key questions can help you determine how you can benefit from it while upholding your vision. Under these two questions, you can also consider your business goals and finances.
Who are you; what are you doing?
What are your business processes?
What are your cash flow projections?
What is your debt-equity ratio?
What other resources can you consider that don’t require cash?
These were the questions Toni and her four other fellow winners of the SheEO that year considered. You can avoid under capitalizing yourself or taking on too much debt through proper analysis and careful discussion of these considerations.
Ready For Growth
It can take time to rebuild a stronger foundation for your business model. However, once you have a strong foundation, you can grow your business significantly. Once Abeego had laid a strong foundation, they could grow up to 500% in a few years. Their revenue continuously increased after their rebranding.
Creating a foundation manual was part of Toni's efforts to lay a solid foundation for her company. This contained key foundational tools for Abeego’s strong foundation.
Documentation of product processes
Tools to measure direct labour costs
Tools for waste management
Strong financials and forecasts
These contents of the company's manual became a big foundational tool for Abeego. Updating this monthly allows you to see your business's actual changes and current situation. Here you can observe updates in your revenue stream and how this impacts your revenue model.
In addition to that, a team unified and heading towards the same, clear goal solidifies your foundation.
"I find it's quite easy to find really great people. But if you don't have a clear picture of where you want them to take you, they could end up taking you in a new direction that isn't the right direction for the company."
Being rooted in the same goal can make your processes much more efficient and encourage a better working environment.
Toni’s participation in Dragon’s Den taught her that an aligned vision isn't only limited to the team. It's essential to build a relationship and align your investor's vision and values with your company's. Without this, it can become challenging to work together.
Earning More Than a Living Wage
Part of your company's financial concerns is considering those who work for you. Many low-income workers are paid minimum wage, which is barely enough for getting by. However, at all levels, your workers are vital to the success and progress of your company.
“I wanted to make sure that no matter what kind of company I build, that the people that worked for me, even at the lowest level of the company, everybody is as important as anybody else.”
This was Toni's thinking behind her hourly rate of $20.50 for her team. What many thought would be a loss in profits benefited the company in the long run. The wage increase drew in hundreds of applicants while other companies were struggling to hire new people.
You cannot make these big decisions blindly because doing so can destabilize your revenue model. Ensure that your company has cash reserves and a positive cash flow projection. Take a look at what needs to change in your product pricing, sales mix and processes to sustain this.
Securing Your Business and Revenue Model
It can be difficult to gain traction and generate revenue when you're establishing yourself in the market. Standing out among your competitors, or in the case of innovations, gaining attention requires resonating and communicating with your target audience. Knowing the right revenue model can help you determine who is your ideal client and the best branding for your products and services.
Securing your position in the market despite crises is another matter. However, this can be overcome with proper planning and awareness of your financial information and the situation. In Toni’s experience facing the COVID pandemic crisis, she chose to cut down on expenses rather than increase revenue. She states:
“There's a certain sensitivity, as a business, that I think that you have to have in understanding how to communicate to your market, and it's not always sell, sell, sell.”
Preserve your revenue generation while doing what you can to help the people. You can do this by securing your supply chain and approaching your financial advisers. This protects your business from disruptions and crises that can impact your revenue.
Growing to the Next Level
To create a strong foundation for your business to grow, you have to be aware of your company's processes and financial flow. This includes awareness of your revenue stream and the right revenue model for what you offer. Establish and secure your business with the best financial decisions. Without sacrificing your profit, you can continue spreading your message and creating a social impact.
If you want to know if your foundations are solid enough to grow your business to the next level, a CFO can help you figure out your next best move. Understand what revenue models are and how it plays a key role in your business model with the help of a finance team. Chat with Profit Reimagined™ to help you cover your foundations and deepen your understanding of these concepts.