Archive for the ‘Revenue’ Tag

Are you charging your customers enough?

Nearly every executive pays lip service to “shareholder value.” But many of them readily, if unwittingly, make business decisions that run counter to that objective.

Over the long run, no variable correlates more strongly with shareholder value than profit maximization — something that many companies do not prioritize in spirit, let alone in practice.

Instead, they often focus on flavor-of-the-month strategies such as market share growth or product innovation. Believe it or not, these are not always compatible with maximizing profit over the long run.

The problem with focusing on market share is that growth is often achieved at the expense of competitors. “Switchers” are the most difficult customers to attract, frequently requiring discounted pricing or free trials, and are also the most difficult to retain. The result is generally a temporary increase in market share that does not translate into higher revenue or lower operating costs.

While focusing on product innovation is always a good place to start, it too can come up short when it comes to maximizing profit. One major reason is a failure to properly price the products. An introductory price that is too low for too long — usually in hopes of stealing market share — may never produce the return a company is hoping for.

The result is that companies often spin their wheels, leaving profit on the table because they don’t understand the true value of their enhanced product — or feel that their brand does not command the heft required to demand premium pricing for premium quality.

Why does pricing go off the rails?

Our consulting firm recently worked with a company whose stock was under-performing relative to its peers. The company’s solution had been to increase market share through product upgrades. Despite considerable money and effort, however, the strategy failed to build top-line revenue and, as a result, investors were unmoved.

When we performed the postmortem we determined that management put a great deal of care into identifying what customers wanted and how to market the products but put little thought into what to charge. Not only were the prices too low to feasibly provide a return on the organization’s R&D investment, customers failed in lieu of premium pricing to grasp the products’ premium quality.

Setting the right price

It can be a challenge to devise and stick to a pricing strategy that reflects the true value of a product or service without compromising competitiveness. Here are a few tips that can make the task a little easier:

  • Ensure that every stakeholder both understands the primacy of long-term profitability and is aligned around that goal;
  • Recognize that there may be special instances when premium pricing should temporarily take the backseat to marketplace competition;
  • Understand your existing and potential customers’ needs and budget and seek to meet both;
  • Enumerate the ways in which your product or service addresses those needs, using tools such as a customer-value model;
  • Consider if or how you need to differentiate and build your brand to support premium pricing.

For more information on our services and work, please visit the Quanta Consulting Inc., web site.

Revenue strategies for a zero growth world

A ‘new normal’ is hindering the revenue generation plans of many North American firms. This climate is characterized by zero (or negative) market growth, margin compression, and cutthroat global competition. Historically, price increases would be a manager’s number one weapon to drive incremental revenue. In this environment, however, it is extremely difficult to do this and still maintain market share. Moreover, most attempts to drive revenues through new product innovation end up failing. And, most markets continue to experience downward price pressure due to product commoditization and a growing private label segment.

To crack their revenue problem, managers should look to other industries for lessons on what works, as follows:

Go where the profit is

Many companies are discovering that higher margins and profits may lie, not in their delivered product or service, but in ancillary services that consumers need and competitors ignore. For example, Apple quickly figured out that its iTunes music service was easily as profitable, scalable and “sticky” with consumers – to the tune of $1.5B in revenues – as selling MP3 players and computers. Rolls-Royce, a leading jet engine manufacturer, discovered that servicing its engines and providing spare parts delivered higher margins and more predictable revenues than engine sales alone. Services now account for over 50% of Rolls-Royce’s revenues.

Super size your solutions

Managers understand that providing products and services deliver higher revenues than products alone. However, what is different today is the nature of these newfangled solutions. Industries as diverse as professional services, transportation, publishing and retail are creating novel solution bundles that take their businesses in new directions. For example, IBM, UPS and Amazon are leveraging their considerable IT and supply chain capabilities to offer client’s innovative performance enhancement solutions that include services like data analytics, consulting, cloud computing services and logistics management. For providers, these new solutions can improve operating leverage, deliver recurring revenue and increase client stickiness. At the same time, these new solutions are subtly redefining the provider’s mission and business model turning them away from a product-focus to an information and IT-driven businesses.

Monetize your latent assets

Content-based firms are beginning to mine the dormant value of their assets, brands and capabilities. Specifically, media companies are evolving from content producers to content custodians and facilitators. For example, leading publications like Bloomberg and The Economist have begun charging higher fees for their subscriptions and have enacted online pay walls. Importantly, they are also exploiting their extensive content and analytics capabilities to deliver research and knowledge leadership services.

Consider new pricing models

Pricing innovation can be cross-pollinated across many sectors. A variable pricing model – where the price changes in real-time based on demand, time or other factors – already proven in the airline industry can be applied to the hospitality, retail, software and entertainment industries. For the past decade, the big aircraft engine companies, including RR, has been providing engines at no charge but billed on a pay-per-time basis (plus support, of course). More than 80% of RR’s engines are now sold this way. New micro payment models like Zipcar (subscription-based and hourly car rentals from staggered locations) and iTunes (purchase 99 cents songs versus more expensive albums) allow consumers to purchase things in small increments from multiple parties, based on their unique needs. Very often, this model spurs product demand, delivers higher margins and increases revenue per use.

Pricing innovation can significantly impact a company’s business model. For a gaming firm like Microsoft, a change could involve the shift from a single X-box game launch every 1-2 years to a 365-day business, with packaged good launches sustained by frequent updates, downloadable content and extensions into social and mobile platforms.

Raise your prices

Contrary to conventional wisdom, it is possible (and essential with rapidly increasing input costs) to raise prices in low growth environments. However, managers need to be smart about how and where they do it. Opportunities to increase prices often exist in sleepy or price inelastic product categories where the firm faces weak or non-existent competition and channel partners, where their pricing is not aligned (i.e. it is too low) with value delivered or where the switching costs of leaving one supplier for another are high.

Organic revenue growth is very possible if leaders are willing to rethink their business model, better understand their customer’s needs & habits, and refine their product and service offering. All that is needed is curiosity, an analytical approach and courage.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.