Are Your Best Buyers Subsidising Your Worst?
In business, as in life, the 80 /20 rule applies. That is 80% of the value comes from 20% of the clients, your best buyers. These are people who value your services and are not looking for discounts. They choose you because of your reputation, and they are prepared to pay more for the certainty that you will deliver for them. These sales are your most profitable.
At the other end of the scale is the 80%. They tend to be more price sensitive. Some of these will also see the value, but the price is not affordable to them, but if a no frills version is offered, they will be happy to accept this so they can still benefit from the core service. These sales are profitable as well. While the absolute margin will be smaller, percentage wise on a smaller scope, the margins are still attractive, and they are likely to make up the bulk of your gross profit.
There is also another group, who want what you are offering, but at the cheapest price they can get. You may have developed a budget version for them, and still they want discounts. Often this group may make up the bulk of your sales, but it is profitless turnover. They don’t cover their share of your overhead. They are getting a free ride. These customers are being subsidised by your profitable ones. This hardly seems fair.
If you increase the price for this group, you will certainly lose some sales, but isn’t that preferable than making a loss on each one? A 10% increase in price would increase a 20% margin by 50%. It’s likely your gross profit will increase with such a strategy even after the loss of a few customers.
Do you know whether subsidies exist in your business?
All you need to do now is to Empower yourself and take action …
May Your Business Be – As You Plan It.
Dr Greg Chapman – The Profit Whisperer
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