While it’s definitely true that the pricing process is the most important aspect of your business, your pricing strategy is only as good as it’s implementation. Almost everyone in your company is involved with pricing, from marketing and distribution to management and sales.
Photo Credit: Horia Varlan
In fact, a low level grunt working behind the counter at Starbucks has more power over the price of your coffee than any council of strategists brainstorming various promotions deep in their corporate coffee cave. After all, if your best friend is behind the counter, then chances are you won’t be paying for anything. We’re not all peddling coffee, but how can your company make sure it isn’t losing money because of poor execution? The answer is to create a culture of profit.
Businesses with a culture of profit rally the team around small changes that have a huge impact on the bottom line (How’s more revenue sound?). Let’s take a look at what exactly a culture of profit is, review why it’s important, and then illuminate three ways you can rally the troops around profits and not excuses, discounts, and the like.
What exactly is a culture of profit?
The concept of a culture of profit was first popularized by pricing guru Rafi Mohammed where he defined the culture as, “a business environment and shared way of thinking that allows your company to price for profits and growth.”
That’s really ambiguous, right? Well, essentially what Rafi is getting at is pricing (and the metrics surrounding it) need to be top of mind for everyone. You need consistent guidelines for discounts; you need to ensure everyone understands the central value of your offerings; and you need to make sure everyone is on the same page about your pricing strategy.
Scale and Consistency: Why is a culture of profit so important?
Profit cultures scale quicker
In the hustle and bustle of a growing business, you can easily forget how much power the rest of the organization has on profitability, especially when you’re adding employees on a weekly, monthly, or even a quarterly basis. Soon you won’t be able to keep tabs on every sales or marketing individual, and if your culture isn’t unified around profitability then value in messaging and value in sales will ultimately be lost.
However, if the organization is centered around the right metrics and profitability, your job becomes that much easier, because everyone is beating to one drum and newcomers quickly conform to the goals of the business as a whole.
Profit cultures empower employees
Even if you’ve managed to scale without a profit mindset, creating that culture can have enormous implications on the bottom line by empowering the team. We’ve worked with dozens of businesses where profits are leaking out of the discount faucet at a flood-like rate, because sales folks on the front line had no insight into the impact of their discounts. Even outside of the sales teams, marketers or product managers may be pushing and streamlining low margin products.
If you empower your team around profit, they’ll follow by moving the company in the right direction from their actions, big and small. A 1% improvement in price equates to an 11% boost in profit. I don’t know many businesses that would rather leave that cash on the table.
Here's how to create a corporate culture focused on profit
Understanding the importance of a profit focused culture is all well and good, but this is still a little fluffy. So, let’s dig into some very specific things you can do to turn your culture around to focus on profit and revenue.
1. Transparency and focus on the right metrics: Make revenue, skus, and margins crystal clear
In the technology world transparency is preached in organizations to the point that it’s almost cliche, which is great, but make sure you’re transparent with your pricing, costs, and profits, as well. Teams relish at the opportunity to be involved in analyzing these sorts of numbers, and immediately feel as if they are truly a partner in the company. You’ll naturally see a shift in team members selling and marketing the right products to the right customers. Plus, the team will realize how large of an impact a few dollars (or thousands) will have on the bottom line health of the business.
The proper metrics to focus on is worth an entirely separate blog post, but make sure you focus on profitable metrics, not vanity metrics. Revenue is great to show to an investor, but margin is even better.
2. Use discounts sparingly and properly
We’ve spoken about the dangers of discounting in a previous pricing strategy post, but to recap, discounts should be used as pointed campaigns, not catch alls. Discounts should only be used in three ways: to upsell customers to products with higher profit margins, in negotiations to make very specific sales, and to keep customers away from competitors. All discounts or promotions should be discreet to a single customer or persona, and shouldn’t keep other customers from paying full price. Plus, all employees should know the limitations of the promotion, as to not leak profit unnecessarily. For discounts and promotions to run properly, the execution needs to be consistent so that these discounts do what they’re supposed to: increase your profits and your customer base.
To sum this up, the actions of any of your employees can affect the price of your product. If everyone on your team isn’t on the same page, then customers new and old might be getting better deals than you intended. Your team might think giving discounts to new and old customers alike will increase loyalty and repeat business, but it’s far more beneficial for your company if these customers are convinced the product is a smart purchase at the actual price.
3. Create and adjust confidence in your product and pricing throughout the organization
When you’re building a lean product, it’s easy to focus on what your product isn’t, especially with a feature wish-list that borders Santa’s Christmas list. On the flip side, when you’re in an entirely new market, it’s easy to focus on how wonderful your product is, even though consumers aren’t quite sure why they need your product (yet). We’ve seen both these organizations amongst our customers, and each results in overpricing and underpricing, driven largely by the team.
To create a culture of profit your sales, marketing, and product teams need to be confident in the value of your product, but also need to clearly know who your product is for and what features and value propositions move the needle for each customer persona. Clearly define your customer personas, in addition to laying out what makes that customer tick.
Once you have this information, preach it from the rooftops. Everyone in your organization should know why your product is so great for each customer, and what that customer needs to be told to make them truly happy. Relayed confidence in the current price and the product’s value also ensures that customers won’t be getting numerous goodwill discounts that cut through your profit margins.
In summary, align your company along implemented value
A cohesive pricing strategy based on value is the best approach to creating a successful business, but the right environment is essential to implementing that strategy. Educating your staff about every aspect of your pricing and the product is the groundwork that helps generate more profit and growth. As long as your employees have some control over the price, then training them in a culture of profit will be the key to your company’s success.