This is one of the most important strategies that you must understand. If implement a wrong pricing strategy, you will find your business not growing as much as you want to. In fact, you may find that your business may fail. After all the right things that you did, you still face failure because of the wrong pricing model.
Major mistake by entrepreneurs is when they set up their pricing. Normally they calculate their staff cost and then add a certain profit margin and that is their price. This is their major mistake. Everyone in the ecosystem needs money in order to function. One of the most important components is your distributor or agent or master dealers. They need money in order for them to function. They have staff cost, office cost, and other expenses that need to be paid every month. If you imagine that they will help sell your product with very little commission, you are mistaken. If they cannot make enough money to cover their cost and make some profit, they will not help you. Do not ever imagine the dealers will use their own pocket money to help you make a lot of money. The base idea is you must have a strategy where your dealers can have enough money to provide for their lunch and dinners, not only for teh tarik. The price that you set must have their cost in the calculation. It depends on the product price. If the product is said every sale are RM2, 000 and you are giving him 50%, then it is worth awhile for them to sell your product. If your product price is RM300 and you only give him 20% commission (i.e. RM60) then he will not be interested. Like I said it depends on the product. In this example, the product is an enterprise solution. The selling effort is not like selling a USB stick which requires not extensive product knowledge. In this case, it requires knowledge of the product, explanation to customers and probably some product use training. The dealer needs to invest internally to have someone trained on your product. They need a good margin to perform this job.
The next item that you need to consider is your advertising and promotion. There must be money allocated for this. Otherwise, you will only spend on A&P whenever you have extra money. In most of the cases, the money will never come. You always have no money for your advertising and promotion. Your branding will be weak. You cannot compete with your competitors that spend more money and effort on their branding. They spend more on their marketing. You spend much less and very sporadic, not consistent. Make sure that your pricing includes this part.
You need to pay your staff well. This will encourage them to stay with you. They can grow with you. Your pricing must ensure that there is enough margin to pay your staff well. Otherwise, you will have a high turnover rate that will negatively impact your company.
By now I can imagine that you will be screaming. You will scream that your price has to go up significantly in order to cater for this. You will be shouting saying this is impossible. You will lose the market share. No problem. This is normal. I did the same thing when faced with the same situation. I only agree to change my pricing after having an extensive discussion with the expert in managing nationwide distribution channel. I only relent after I look from distributors point of view. They need to survive. They need consistent income. They need enough money to sustain and grow their operation. When they grow, you also grow.
I changed my pricing. In fact, I increased my price by 100% in order to cater for this calculation. Surprise. Surprise. My order did not reduce. In fact, the business volume goes up. Many distributors come into the ecosystem. I make more profit. My distributors are happy. My agents are happy. This is the opposite of my initial fear.
I suggest you look at your pricing and make sure those in your ecosystem can make money when they join you. Not ‘teh tarik’ money, but lunch and dinner money. Their major income comes from selling your product. You will see your business grow when your partners can grow by partnering with you.
If you look at our profit and loss report, you should be able to see how much you spend on your advertising and promotion. Look at the percentage of sales. Look at the trend. Look at the gross margin. Do you have enough margin to do the other things that I mentioned earlier? If not, then your pricing may be a problem.
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