You've been in business awhile and you've heard all the typical tips for shifting to positive cash flow.
Invoice financing, reviewing vendor terms, evaluating materials costs and doing regular reviews for hidden recurring expenses... You know your balance sheet and cash-flow projections forward and back.
But when's the last time you reviewed your pricing strategy?
There's more to the dollar amount in front of a product or service. Customer value is the engine behind pricing strategies that can lead to long-term, positive cash flow.
It makes sense to treat pricing as a partnership with your most valuable asset: your customer.
“Having well-considered pricing strategies is crucial to sustain profitability in a business system," says Phil Jones,
the best-selling author behind the Exactly book series.
Those well-considered strategies are the foundation for positive cash flow in your business.
Defining Purpose for Price-Driven Positive Cash Flow
“Maybe you are looking to attract new customers from your competitor and steal market share," says Jones. "Perhaps you are looking to up-sell your core product. Maybe you are looking to increase loyalty and retention of existing customers. Without a clear purpose the strategy could be easily misplaced."
As you set out to review your pricing strategy, begin with a goal. Define what you want your new pricing strategy to achieve.
“When businesses contemplate pricing, it's easy to think about just changing a number," says Ian Altman,
a strategic advisor who helps companies modernize their sales and marketing approach to align with how customers actually make buying decisions.
“However," he continues, "you might [want to] rethink your pricing model entirely."
Altman recently worked with a large law firm that made the shift to a flat-fee service plan. The goal? To improve client-firm relations and make cash flow more predictable at the firm.
With the flat-fee plan, clients don't have to worry about being billed for a phone call or email. These services are now rolled into a worry-free plan that offers clients predictable expenses while bringing significant benefit to the law firm.
“The law firm has better cash-flow management and receives funds at the beginning of the quarter. When clients under-utilize the service, the firm can take on a strategic task at no additional charge. This increased client satisfaction and improved client retention," says Altman.
The Downside of Price Reductions
You might consider price reductions as a way to increase positive cash flow. While lower prices could potentially bring in new customers and cash, both Jones and Altman advise caution with price reduction strategies.
“You might think that to attract more customers, you should reduce your price," Altman posits. “However, if you offer a premium product or service, lower prices might cause your customer to devalue your company if you are not priced similarly to your competitors."
In addition to potential devaluation from the client perspective, Jones advises companies considering price reductions to evaluate their capacity to handle larger order volumes.
“Pricing aggressively and with low margin may result in challenges with fulfilling the demand created—or perhaps even increased labor expenses for the additional business," says Jones.
This is why it's important to establish a goal for your pricing strategy. Understand the implications throughout your company for the pricing shift. And never forget the customer's point of view in every pricing shift you make with an eye on positive cash flow.
Top Tips for Pricing Strategy Adjustments
It's tempting to bump up prices and pat yourself on the back for the temporary positive cash flow. There is, however, a savvier approach to yield long-term revenue results.
“Always review pricing from the client perspective first," advises Altman.
How will your clients perceive your proposed pricing shift? It's important to keep in mind that while your costs might have gone up related to production or delivery, the value for the client has remained static. This could lead to a pricing increase that nets a few new customers while costing you those long-loyal to your brand.
Pricing shifts have cross-company effects, from customer to customer care. An increase in value for the customer must come with each one.
To reinforce this value-based pricing strategy, Jones advises thinking about that downline. How will the shift you make today help both earn new customers and retain them long-term?
“Use your pricing strategy to help customers choose you as opposed to someone like you, step up and buy the next level...and then keep buying from you again and again," says Jones. “If your pricing can create that sequence of events, you will have hit the jackpot."
To help you achieve these long-lasting, positive cash flow results, here are four questions you can ask about every pricing shift you consider:
- How will this pricing change lead us to our desired goal? (e.g. higher per-transaction profit, increased loyalty, higher conversion rate)
- What are the expected short- and long-term effects this pricing change will have on our overall cash flow?
- Who will be affected by these changes—both internally and externally?
- What adjustments will we need to make to ensure we can continue to deliver the highest caliber of service or product?
These tough, customer-focused questions can set you up for lasting success with your pricing strategy.
But, perhaps more importantly, these questions will also help ensure that you're not raising pricesfor the sake of short-term gains. They can help provide a foundation for pricing new products and services and regular pricing strategy review.
These questions are an ever-present reminder that your customer is the reason you stay in business each day.
Pricing without your customer's wants, needs and frustrations at the center of your cash-flow strategy is an one-sided, short-term endeavor.
With all that you've put into your company, it makes sense to treat pricing as a partnership with your most valuable asset: your customer.
Read more articles on cash flow.