Chapter 9

Is Your Profit Potential Acceptable?

In-a-Rush Tip

If you’re satisfied with your potential profits, as calculated in the previous chapters, you can skip this chapter.

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So now that you’ve established what buyers are prepared to pay (Part 2), and what your costs are (Part 3), how does it look when you subtract your costs from the potential price range?

Are you dancing in the streets over your pending wealth? Great! Then you’re almost done. Just some critical fine-tuning to go.

Or did your numbers show low or nonexistent profits? No need to bang your head against a wall or swear. There are a number of ways you can turn this around, and you’re about to see them all in this chapter.

If You’re Happy with Your Potential Profits

If you can make a healthy profit given your costs and the price buyers will pay for your combination of benefits, negatives, and price position, you’re still not quite finished.

There are enormous differences in buyer demand based upon pricing psychology, which we cover in the next chapter. You can skip there right now, or read the rest of this chapter to find possible ways to increase your profits even more.

If You’re Not Happy with Your Potential Profits

Yes, it’s disappointing to see low or no profits for an idea you have spent a lot of time developing. But there are still a number of choices available to you.

Best of all, you discovered the problem before you spent a bundle launching something that wouldn’t be a financial success. When you can either back out of it or change it so that it can be profitable.

Option #1: Dump the Idea and Move On

This chapter will give you a lot of ways to turn your problem into a potential winner. But if you review them and don’t find any that would work for your situation, then the best answer is to kill the idea and move on. That’s the difference between an entrepreneur who tries a couple of ideas before finding the one that leads to success and a bankrupt entrepreneur without the funds to start his or her next idea: The next one that might actually become a success.

It’s really hard for entrepreneurs, given our self-confident makeup, not to think we can be the exception. I do understand because I’ve been there.

Example: After two successful launches (a magazine and a newsletter), I got test results for a different newsletter that were so-so. Not a terrible failure, but not a success—more like in the “breakeven” area. I was sure I could make it happen because the idea was so good and so needed. (Hint: It was needed, but it wasn’t wanted enough. People don’t buy what they need unless they also want it!) So I launched it, and the results were exactly like my tests, despite all my “improvements” that were supposed to make a difference. It lasted three issues, until I cut my losses. Lesson learned? Trust what the market tells you, even if you don’t want to.

Not launching a product that can’t succeed is not a failure; it’s a success. You saved your money. Here are some examples of companies that faced this same choice:

• Porsche AG stopped developing its Porsche 989 when it was discovered the cost would be 30 percent higher than the price that could be achieved in the market.
• Spalding’s pump baseball glove was considered a great idea, but a $100 (required) price tag soon put an end to all market chances.
• When Mercedes-Benz introduced its new S-Class in the early 1990s, sales fell significantly short of goals. Analysis revealed that the gap between the customers’ requirements and the features offered was too great to achieve the price that had been established (Butscher and Laker, 2000).

Option #2: Change Your Price Positioning

If you can’t make enough profits in the price-positioning strategy you chose, can you switch to a higher price positioning? Can you move to competitive instead of penetration? Or can you move to skimming/prestige instead of competitive?

You would obviously have to add benefits or subtract negatives in order to better compete with a higher-priced group of competitors.

Here’s how to test out this strategy and see if it will be more profitable for you:

How do your potential profits look now? If you are now happy, you can skip to the next chapter for psychological fine-tuning. Or you can continue reading this chapter to find even more ways to increase your profits.

Option #3: Offer Some Higher-Priced Add-Ons

One way to improve your profits is to find options (add-ons) that have a very high profit margin. If enough people buy the add-ons, it raises your overall profit margins.

Explanation: If your basic offering would need to sell for $100, and your total costs are $98, you have just a 2 percent profit margin ($2 profit/$100 price). Suppose you have an add-on that could sell for $10, and your costs are just $1. That’s a 90 percent profit margin.

If someone bought both, you’d have sales of $110, with $99 in costs for a 10 percent total profit margin. If half your buyers took the add-on, you’d raise your overall profits from 2 percent to 6 percent.

In some industries, the price of the most basic configuration or basic service is kept artificially low to attract consumers. In those industries, consumers expect to see a certain low price—and if you don’t offer that price they will avoid you.

Often in those industries, most consumers don’t take just the basic, but they add on additional options—and those add-ons have a higher profit margin.

Go back to your Chapter 3 worksheet and look at all the add-ons that your competitors are offering.

Figure your costs for adding any of them that would be complementary to your product. Then figure out what your potential profits would be on the add-on, given your costs and a price about the same as your competitor(s). That’s the easy part.

It’s much harder trying to estimate how many buyers would take the add-on instead of the basic version. Short of finding industry data, or talking to retail salespeople (if it’s offered in stores), your best chance is talking to people likely to have bought such a product and finding out what they did. This can work especially well if you have a B2B purchase and can attend a trade show or conference where many of the attendees have either purchased or considered such a buy. Beyond any of that, you are left making a guess. In that situation, try to guess conservatively, by underestimating how many people would take it.

Obviously, if you can offer more than one add-on of value to buyers, and all of your add-ons have a fat profit margin, you are in a better position to run without changing your price positioning.

Option #4: Offer Some “Utilities” that Will Allow a Higher Price

Consider the four “utilities” that your product or service provides to buyers. If you can segment customers by their needs for these utilities, you may be able to differentiate your offerings into a basic and a higher-priced version for different groups. This can raise your overall profit margins.

Time Utility

Can you price differently by one of the following?

• Faster service. People will pay a premium for it, unless your competitors already offer it for free.
• Time of day or day of week. People pay more for evening movie tickets, peak-hour electricity, airplane travel during the business week, and late-night taxi rides.
• Seasons. Spring skiing is cheaper than skiing in the winter with more reliable snow. Hotels and travel have “peak season” premiums.

Form Utility

Can your product be offered in different forms? If so, some of those may command premium prices.

• For example, consider soap. The price (and profit margin) is cheapest for bar soap. You get a higher profit margin for liquid soap, perfumed soap, sensitive-skin soap, or soap-on-a-rope.

Place Utility

Can you offer your product or service at a place more convenient to all (or a group of) your potential buyers?

• For example, food delivered to customers’ homes, professionals who make house calls or have offices in shopping malls, or exercise professionals who come to businesses for their employees. All these carry a premium price for the buyer convenience.

Possession Utility

If you are in a marketplace where people typically rent (or get limited use of) your type of product or service, is there a group of people willing to pay more to actually own it?

Option #5: Find Customer Segments Willing to Pay More

There may be sub-groups of targets for whom your service is much more critical than for others. Typically such customer groups will pay more than the others, with some added benefit or feature.

Consider this list of options and evaluate whether or not you could offer an “enhanced” product or service to one or more of these groups:

• Usage segments
  • If all your competitors make “general purpose” products for more than one group, you can raise prices (and profits) by customizing the product for each.
    • For example, you and your competitors make swim goggles used by competitive swimmers and triathletes. If you could customize (even in a small way) so you have Triathlete Swim Goggles and a separate Sprint Swim Goggles (maybe better able to handle diving in the water at the start of the sprint?), you could get higher prices and higher margins.
  • Heavy users versus light. You can save money (less packaging) by making jumbo sizes of your product(s). And you can earn fatter profit margins by making single-person sizes (half the size usually comes at two-thirds or more of the price).
• Psychological segments
  • Can you add a (higher-profit-margin) version that appeals to consumers who want to identify with something?
    • For example, a credit card with a nursing magazine logo identified the holder as a nurse and was successful.
  • Can you add a “Message” version that appeals to consumers who want to promote a cause?
• Demographic segments
  • Males versus females. Would gender-specific versions sell better? (Hint: Unless it’s for young girls, don’t just slap pink on it and expect women to prefer it.)
  • Can you add a more advanced (higher profit margin) version for younger consumers? For older?
  • Can you add a “professional” version that has more job-friendly features?

Next Step

If you already show acceptable profits, or you project that one or more ideas from this chapter will allow you to have acceptable profits, you are ready for the next chapter—psychological adjustments to prices.

If none of these ideas will allow you to get an acceptable profit, given your costs and what your analysis of the market shows buyers are willing to pay, you have just two choices left: