"We can make it up on volume"! These seven words, when uttered by any business owner, usually spells doom. They are typically spoken when a business experiences a cash flow problem. It is very tempting to cut prices in order to generate cash. However, nothing good ever comes out of this strategy. A simple 5% cut in price has a multiplied negative effect on the bottom line. Depending on you margins, cutting price for any reason, will lead you down a dark path.
Business is a game of margins and not of volume. If you studied the modules in The Designer's Coach, you would have learned the importance of pricing based on presenting your value message. This value message is required to maintain the margins we need. We are in a complicated business, and we must have proper margins to succeed. Our goal is to sell at a higher then average margin for our industry.
It is a fact that most businesses go broke because they sell too cheap. Our target customer does not buy on price alone. If you think she does, then you are either targeting the wrong consumer, or you have a common misconception: You are not your customer. Just because you think your price is too high, doesn't mean your client will think so.
You need to address the importance of keeping your promises, and exceeding your client's expectations. Up to this point, we have made a lot of promises and raised the expectations to a point where we had better not disappoint. The client has agreed to pay a premium because of your guarantees.
Additionally, you must have the necessary defenses against price shoppers. If you can't win against the price shopper, then it is time to say good by to her. Dealing with this group of consumers has many negatives. They take up too much time, and do all the complaining. They spread the word on how little they paid you, and they destroy your credibility. Instead we have stated our firmness on price, made promises for a great experience, and we delivered to the client's delight.
With the understanding of maintaining healthy margins, how do we know what our margins are, and what should we consider a "healthy" margin? It begins with keeping accurate records of all costs associated with completing a job. How do you track your costs? Do you account for all the time and labor? What you will find, if you do, may surprise you.
In my business, Decorating with Fabric, we have created an accounting system that we call The Designer's Books. It is an online, outsourced network that keeps an accurate accounting of all the financial aspects of running our business. The Designer's Books records all time and costs incurred for every job we do. I am able to generate reports that give me the ability to monitor the margins for each product and service, as well as for each job. The Designer's Books is also synced with a Client Management System, to monitor all aspects of a job's progress.