Business Growth Archives

How Should I Develop a Pricing Strategy for Products & Services?

Posted on February 20, 2024 | by David Worrell | Leave a Comment

No one wants to undervalue themselves, but they also don’t want to set a price that will drive them out of business. Many small business owners are left with the question: Am I charging enough for my products & services? A well-thought-out pricing strategy is essential to balance profitability and market competitiveness.

Many business owners use what I like to call the Laugh Test, which means they continually raise prices until their client base walks away laughing.

But, there’s a more refined art to pricing than this trial-and-error method. Let’s explore the nuances of smart pricing strategies that meet market demands and ensure your business’s profitability and growth.

Market-Driven Pricing

Smart pricing means listening closely to what the market is telling you. Assess the market’s tolerance. Market-driven pricing requires thorough market research regarding the amount the market will bear, what your customers are willing to pay, and what your competition is charging.

The answer to these factors allows you to gauge customer willingness to pay and understand your market. This leads to setting competitive pricing to align with customers’ expectations.

It forms a foundation for a strategy that is both competitive and profitable. Finding that sweet spot where your pricing strategy aligns with market expectations and customer satisfaction is key.

COGS-Driven Pricing

COGS is a common abbreviation for Cost of Goods Sold. COGS-driven pricing means you charge enough to cover all the variables that go into your product or service.

This includes obvious items like raw materials and labor but also less-than-obvious costs like gasoline for deliveries or the time your staff spends traveling to a client’s location.

Understanding all of your variable costs in detail is a prerequisite for setting your prices.

Backbone of Your Pricing Strategy

But COGS isn’t the only consideration: A solid pricing strategy covers the cost of goods sold (COGS) and a contribution towards overhead expenses. The pricing formula is:

Price = COGS + (Overhead / Average Volume) + Profit.

This formula ensures that you’re not just breaking even but also making a profit.

Once you understand your cost structure, create an easy-to-remember pricing formula. An example is the 25/25/25/25 pricing model, I once used in a golf club manufacturing company. In this case, the price of the golf clubs included 25% each for COGS, sales costs, overhead, and (of course) profit.

Formulating the best pricing formula depends on your current overhead burden. For example, in a service business like accounting, you might aim for a 40/30/30 model, where 40% of the hourly rate covers the accounting labor, 30% goes toward overhead, and 30% is reserved for net profit.

This model helps you ensure that your pricing covers all variable costs, overhead, and salary and still leaves room for profit.

Psychological and Strategic Considerations in Pricing

But pricing is not just a number game; it’s deeply rooted in psychology. The way customers perceive your pricing can significantly influence their buying decisions. Price too low, and you risk undervaluing your offering; price too high without justifying the value, and you might deter potential buyers.

Dynamic pricing, which involves adjusting prices based on market trends and changes in cost structure, can be an effective pricing strategy in a market where demand fluctuates over time.

Smart pricing is about more than finding the highest price the market will bear. It’s about understanding the complex interplay between market demands, cost structures, and strategic positioning.

Whether you’re pricing products or services, the principles remain the same: know your costs, understand your market, and price confidently.

FuseCFO

Refining your pricing strategy is an ongoing process. At FuseCFO, we can help you understand market trends, cost analysis, and strategic pricing. We’re here to help you develop a pricing strategy that covers your costs and creates profitability that aligns with your business objectives.

We’re not just about crunching numbers. We’re here to guide you through every aspect of financial strategy. So, if you’re ready to take your pricing strategy to the next level, schedule a free business analysis with us. Let’s work together to ensure your pricing covers your costs and maximizes your profits.

Portfolio Diversification When Your Business Is Your Largest Asset

Posted on May 31, 2022 | by mpitre72 | Leave a Comment

This is a guest contribution by Ben Reynolds, founder of Sure Dividend, an investment research company dedicated to helping investors build high-quality dividend growth portfolios for the long run.

What is Portfolio Diversification?

The term“portfolio diversification” means something different for someone on a ‘normal’ career trajectory and a business owner.

Company owners face different investing tradeoffs that largely go unexplored.

It’s important to view your investment portfolio holistically when your business is your largest asset.

The Business Owner’s Complete Investment Portfolio

When we think of an investment portfolio, we tend to think of stocks and bonds. But that overlooks two critical assets: your home and your business.

Your business and your primary residence are likely your most valuable assets; yet, they are often not considered when determining an appropriate asset mix for building wealth.

Your small business presents unique opportunities to invest in the business. You should weigh these investment opportunities against other opportunities, including investing in the stock market.

Investing In Stocks Versus Investing In Your Business

Investing in your business will often have the highest expected total return of any investment you can make.

Whenever possible, owners should make investment decisions based on thoughtfully based data.

To understand the value you create by investing in your business, you should look at the increase in cumulative business value from the investment, not one-year revenue growth or expense reductions.

Imagine you invested in a better website layout and conversion funnel for your business. It cost $30,000 and increased sales from $2 million to $2.1 million. The $100,000 in increased sales partially falls to the bottom line and net income increases by $50,000. If the business was making $500,000 in annual profit before, it now is making $550,000.

But $50,000 is not the entire return on your investment. If your business is valued at a 5x multiple to net profit, this extra $50,000 in annual profit really creates $250,000 in value. Getting $250,000 in value from a $30,000 investment is an incredibly high return – and something that isn’t going to come anywhere close to being matched by investments in stocks or other asset classes.

The Downside To Investing In Your Business

While the upside to investing in your business is incredible from a return perspective, you should also be aware of the risks.

First, most business owners’ net worth comes predominantly from their businesses. Consider a business owner with the following items on his or her balance sheet:

Business valued at $2,000,000
Primary residence with equity of $350,000
Investment portfolio with $150,000

A full 80% of this business owner’s net worth comes from the business. Owning and growing your business is perhaps the best way to create wealth. But it also concentrates your wealth into one area. And the business world is inherently risky.

There’s a reason investment advisors advocate diversification. If all your money is tied up in just one stock and that stock goes bankrupt, you face financial ruin.

While you have agency over your own business that you don’t have with stock investment, risks remain. They are amplified. If anything were to happen to your business, you lose (at least temporarily) not only your largest asset but also your source of income.

It’s critically important to build at least some wealth outside of your business assets. If your business is partially or fully impaired, you can fall back on other assets.

Investing outside of your business might result in slower wealth growth, but this strategy will fortify your finances against temporary (and, at times, even permanent) business declines.

Your trade-off between risk and return is investing in your business versus investing outside of it.

Investing Outside of Your Business

When determining the appropriate asset mix for yourself, think about your business objectively and invest outside of the same industry.

If you owned a thriving restaurant, you wouldn’t want to fill your investment portfolio with the stock of McDonald’s (MCD), Domino’s Pizza (DPZ), and Chipotle Mexican Grill (CMG). You already have most of your net worth exposed to the restaurant industry.

An unforeseen industry-wide negative event would impair your investment portfolio at the same time it impairs your business. Instead, a restaurant owner would want to invest in assets that are not correlated or related to the restaurant industry.

What Type Of Assets To Consider

Publicly traded stocks are still connected to businesses. Investing in stocks means buying fractional ownership of real businesses. Investing in stock market-based mutual funds and exchange-traded funds (ETFs) equates to efficiently buying smaller ownership percentages of more businesses.

As a business owner, you already have most of your net worth exposed to the business cycle. As a result, a portfolio that has less exposure to the stock market than average may be a good fit, depending on your risk tolerance.

A key to selecting asset classes is determining how correlated they are with one another, especially during recessions and market drawdowns.

In practice, this may result in a heavier bond and gold portfolio for diversification relative to a more ‘standard’ portfolio. A modified version of the Permanent Portfolio is an interesting place to start.

At Sure Dividend, we prefer high-quality dividend growth stocks. These are stocks that have long histories of paying rising dividends year after year. The Dividend Kings list is a great place to look for just such businesses. To be a Dividend King, a stock must have 50+ consecutive years of dividend increases—no small feat.

While stock investing, in general, is risky, investing in blue-chip dividend growth stocks may make sense for business owners. These stocks tend to have less business risk than less proven stocks and more speculative startup stocks. I’m a lot more confident in Johnson & Johnson (JNJ) than I am in an early-stage biotech startup.

Final Thoughts

Being a business owner gives you special investment opportunities that non-business owners simply cannot access.

Taking advantage of the opportunity to reinvest in and grow your business is an incredibly powerful wealth-building tool. Investing in stocks, bonds, or gold very likely will not come anywhere close to the expected total returns of thoughtful reinvestment.

But, having most of your net worth tied up in your business presents significant risks. Declines in business are unfortunately common events. That might bring a potentially permanent impairment of your investments in your business.

That’s why it makes sense to build up wealth outside of your business as well. This may mean slower growth for your business when you don’t reinvest all your proceeds back into your business. But it makes for a more robust and less top-heavy wealth allocation.

How CFOs (Chief Financial Officers) Can Handle Investments

Posted on January 20, 2022 | by mpitre72 | Leave a Comment

Guest Post By Sam Bowman

The role of a chief financial officer (CFO) is an essential component of a thriving C-suite business. Their approach to your resources is key to not just survival but also innovation. Your CFO’s expertise can mean the difference between your company falling behind the pack or achieving an impressive trajectory.

One of the areas in which your CFO can have an impact is your company’s approach to investment. It’s no secret that it’s a precarious time for such expenditure. Between the fallout of COVID-19 and supply chain issues, many companies are reluctant to allow space for investments.

Yet, the right CFO can help you navigate difficult periods and invest in the right areas to help your company thrive. Let’s take a closer look at how your CFO can help handle investments in the current climate.

Thinking Long-Term

One of the dangers C-suite businesses face during a difficult economic climate is in being too short-sighted regarding investments. This is certainly understandable. You may feel it best to place the majority of your focus on putting out any immediate fires.

You may want to make short-term gains before you can be in a position to consider the future. While there is certainly some wisdom in this cautious approach, your CFO can develop a long-term investment strategy to make certain you can thrive beyond the current hurdles.

One of the core skills any CFO worth their salt will possess is examining the markets and making assessments as to their direction. They are not fortune-tellers by any stretch of the imagination.

But part of their remit is to perform research and data analysis into the elements related to your company’s long-term financial health. This will include establishing the upcoming needs of consumers in your industry and where smart investments should be made to push the sustainable growth of the business.

It means your CFO can take your business beyond mere survival. The market research and financial forecasting they perform allow them to plant seeds for your future success now. Indeed, they’ll translate their findings for key organizational stakeholders to demonstrate how and why these investments are important. This is a vital tool in achieving stakeholder support and even greater external investment into the company.

Diversifying Wherever Possible

A CFO’s attitude toward an investment strategy should always be multifaceted. This has to be tailored to the unique needs of the corporation. Yes, there will be some areas that are consistent among many businesses, particularly those in the same industry. But your CFO should understand your company can’t rely on a single source of investment. They have to develop strategies to meet the various needs.

As such, they need to constantly review the balance of active and passive investments. This may be reviewing how placing resources into the education of individual staff members might produce both direct financial returns.

It could be establishing what investment into innovative technologies may put you ahead of the curve in your industry. Alongside the active components, they are likely to also consider a range of financial investments to support the underlying operations of the business.

These passive investments aren’t necessarily limited to traditional stocks and bonds. Your CFO should have in-depth knowledge of varied investment focuses and techniques. While alternative investments are traditionally considered to be risky, they can help make for a stronger portfolio.

Some of the more common types of targets here are real estate, hedge funds, and even collectibles. Though some organizations also invest in cryptocurrency and movie production. (Side note: If crypto is a big part of your business plan, minimize risk by using a pre-built turnkey crypto exchange. )

Part of the role your CFO will play is identifying these opportunities for diverse investments and establishing their suitability for your company. This may not just be on a strictly financial basis. They could also consider the value these investments provide in community engagement and marketing potential.

Maintaining Risk Awareness

An effective CFO doesn’t just wade into the fray and start recommending diverse long-term investments despite a shaky economy. That’s a surefire way to find your business in a state of crisis.

A core part of their responsibility in handling your company’s investment approach is solid financial risk management. Their expertise and strategic experience can mean your company moves confidently forward with a more informed set of investment principles.

As such, it’s important to bear this aspect in mind when taking on a new CFO or reviewing the suitability of your current contributor. Experience or professional qualifications in general risk management are certainly an advantage. This is because almost all the common forms of risk — financial, compliance, debt, and liquidity — feature in considerations for your investment portfolio.

It’s also wise to look for a CFO with technical accountancy qualifications. Their accountancy skill set will include an in-depth and practical understanding of the ethical, commercial, and logistical elements of business finance.

These competencies will allow your CFO to work closely with the finance department and recognize areas of stability and concern in both the daily operations and long-term view. As such, they’ll be well-equipped to both understand the full extent of and manage the risks that apply to your investment strategy.

This risk awareness also factors into the psychology of approaching the financial markets. Your CFO’s appreciation of the applicable hazard factors helps to drive their instincts when it comes to recommending tactics and focuses for investment. They’ll be better informed about which investments and tools mesh effectively with the unique set of risks your company is working with.

Optimizing Investment Strategies With AI Search Solutions

Integrating AI Search software into your financial strategy can significantly enhance your CFO’s ability to forecast and navigate risks. This cutting-edge tool uses machine learning technology to sift through vast quantities of financial data, identify patterns, and predict market trends – all of which help make informed investment decisions. Thanks to its precision and speed, this innovative tool enables your CFO to stay ahead of the game by dynamically adapting strategies as risks emerge and new opportunities present themselves.

Conclusion

A CFO is an essential influencer of your organization’s success story. Their expertise and experience can be particularly useful when it comes to developing an effective investment strategy. They have a nuanced perspective of the long-term needs of the company.

Not to mention their approach should embrace diverse sources that support all facets of your company. It’s also important to make certain your CFO has the skills to manage the risk elements of your investments, particularly in a tough economic climate. Investment is always a tricky area to get right, but it’s vital to treat your CFO as a trustworthy and agile resource here.

How To Factor Corporate Philanthropic Efforts Into Your Business’s Finances

Posted on December 9, 2021 | by mpitre72 | Leave a Comment

Guest Post By Sam Bowman

Your business can simultaneously help a nonprofit, develop ties within its community, and extend its market reach. However, corporate philanthropy requires careful planning and attention to detail. With the right approach, your business can factor philanthropic efforts into your finances — and help your company and the community as a whole.

Why It Pays to Prioritize Corporate Philanthropy

Corporate philanthropy can provide a competitive advantage. It can serve as a form of public relations or advertising and allow a business to showcase its brand within its community. Meanwhile, it lets a company highlight its commitment to a cause. It can lead to high-profile sponsorships that help a business extend its reach, increase its earnings, and distinguish itself from rivals.

Thanks to corporate philanthropy, a business can improve employee morale as well. Giving workers opportunities to volunteer at a nonprofit can help a company engage with employees and keep them happy. These employees may be more prone than others to support their company in any way they can. The result: a business can use corporate philanthropy to help its employees feel and perform great.

How to Account for Corporate Philanthropy in Your Business’s Finances

Corporate philanthropy can help your company stand out from its competitors. It does not require you to break your budget, either. Now, let’s look at five tips to help you make room for corporate philanthropy in your business’s finances.

1. Compensate Your Employees

Let your employees perform their everyday duties at a nonprofit and compensate them accordingly. This enables a nonprofit to add temporary help to perform tasks across a wide range of areas. For instance, you can have your accountants help a nonprofit get its finances in order.

Or, you can offer human resources support, so a nonprofit can develop and implement effective HR policies. By compensating employees who work with a nonprofit, you can help your workers do good deeds with little to no impact on your finances.

Plus, you may be better equipped than ever before to encourage employees to commit time, energy, and resources to nonprofit work. The result: these employees will do their best to deliver outstanding results for a nonprofit.

2. Give Up Your Time

Set aside a work day for your employees to work at a nonprofit. Doing so enables your workers to commit their full attention to focus on what’s most important: helping a nonprofit.

Giving up time to help a nonprofit can help your business’s finances in several ways. First, your employees can take solace in the fact that they are contributing to a good cause. This can ultimately translate to superior productivity in the workplace going forward.

Also, your employees can promote your company during their nonprofit work. They can show your community what your company is all about, without putting a dent in your marketing budget.

3. Offer Seasonal Help

Allow employees to help a nonprofit at busy times throughout the year. For example, you can offer marketing support to a nonprofit that wants to promote special events around the holidays. Furthermore, you can provide access to your accountants if a nonprofit needs assistance during tax season. Tax season is tough for everyone, but it can be confusing for nonprofits that run with skeleton crews, especially if they generate significant revenue.

The seasonal help a nonprofit needs varies based on the organization. As such, learn about different nonprofits in your community and find out if certain seasons are busier for them than others. Next, you can offer assistance to myriad nonprofits at different points during the year.

4. Donate Goods and Services

Offer goods to a nonprofit instead of money. Product samples and other goods may be readily available to your business. You can donate these goods to a nonprofit, so the organization and its stakeholders can use them. In addition, if the products have your business’s logo or name on them, they can help you promote your brand in your community.

Along with goods, you can donate various services to a nonprofit. A business’s expert web developers, for example, can help a nonprofit build, launch, and maintain a website. Provide services that a nonprofit can use, free of charge. This can help your business foster goodwill with a nonprofit. It can lay the groundwork for a long-lasting partnership with a nonprofit and its stakeholders, too.

5. Establish Partnerships

Seek out nonprofits in your community and partner with them. Over time, you can foster partnerships that help your business thrive. As you develop nonprofit partnerships, continue to explore ways to grow these relationships.

Your company can work with a nonprofit to find opportunities to spread the word about your respective goals and missions. That way, both organizations can get the most value out of these partnerships.

Use Corporate Philanthropy to Gain a Competitive Edge

Corporate philanthropy can benefit your business, employees, and community. With the right approach, your business can empower its employees to support a nonprofit. Moreover, your philanthropic efforts can help your company grow.

Get started with corporate philanthropy and account for it as part of your business’s finances. Then, your company can use philanthropy to help a nonprofit, make a difference in its community, and gain a competitive advantage over its industry rivals.

Tag: Business Growth