Less Income More Profit
Isn’t this a contradiction?
Insurance is a complex and baffling business. It’s all about cash flow. Insurance companies gather statistics about their clients. Statistics can tell with a very close tolerance how much will be paid out in various kinds of claims. No statistic can tell which individual policyholder will collect, however. The company would love to know which client will have a claim.
That’s why insurance companies gather statistics about their clients. Almost anything about their personal or business lives is noted and compiled, and the insurance company can build a fair representation of whether an individual is more or less likely to have a loss and so have a claim to be paid.
The company doesn’t want to write insurance for someone who is likely to have a claim. They certainly don’t want a claim filer who pays a low price. And some people they won’t insure at any price. The ideal client is one who pays premium for years and never has a claim. So companies work hard to limit their policyholders by refusing to write them at all, or by raising premiums for the policy holders they do have.
Market forces do come into play when the company no longer has enough policyholders to pay the few claims they do have, so the restrictions mentioned before are loosened and people come back. That is until the cycle starts over again. But this is a discussion for another time. Let’s just stick to one side of the equation.
This is a perfect example of Return on Investment (ROI) in action. The company knows it will have claims, so it has to make sure the money is available for payment. The company also has shareholders (or policyholders if it is a mutual company), so it needs money to pay profits or dividends to its owners. The more money it can keep, the better. Even less income (because of fewer clients) can result in more profit.
One of the big box stores (I really don’t remember which one) used to have a slogan that went sort of like “Savings in dollars, profits in pennies.” This was an expression of the concept that high volume makes up for low prices. Unless your business is WalMart or Amazon, that simply won’t work for you. That’s why small businesses should not attempt to compete with price. Small business doesn’t generate the volume.
There’s an old joke about a farmer who brings his bales of hay to the feed store every day, and sells them for $1 each. One of his neighbors stops to chat one day and says, “Zeke, I know that it costs you $1.50 to produce each bale. How can you afford to sell them so cheap?”
Zeke smiles knowingly and beams, “Oh, I make up the difference in volume.”
I hope I don’t have to explain that no matter how many bales he sells, he still loses 50-cents on each one. Unfortunately, many folks in business seem to need that explanation.
The commonly accepted solution to Zeke’s problem, and maybe yours, is to raise prices. But there is also a thing called competition. Let’s imagine that somehow Zeke persists in selling his hay at a loss. If you are trying to sell hay for $2.50 a bale, how many folks will come to you if they can get the product from Zeke?
If we substitute WalMart for Zeke, how can WalMart sell items for less than (or just pennies more than) the cost of the item? Volume aside, they also do it by having other items for sale that are more profitable. This shift in scale is due to scope of choices rather than number of sales, but it is still a volume issue.
Are you seeing the point? The small business cannot compete on price. But what if you could remove price as a factor?
Are you a professional business? Are you a lawyer, a veterinarian, a home remodeler? This shifts the ground just a bit. Now your prices are constantly being pressured downward by the simple fact that the law is the law and what one lawyer can do is pretty much what any lawyer can do. How do you differ from Ken Nunn or “The Hammer?”
Look at my business, tax preparation. I cannot possibly compete on price with TurboTax. In fact, the tax software I use in my practice is simply the professional version of TurboTax. So how can I charge more than $100 or so for a tax return? Believe me, I do charge a good deal more than $100, and I have a good number of people who return to me year after year.
In the same way, your artisan and professional business becomes profitable by attracting and keeping clients who need precisely what you offer. Better yet, they are not price sensitive precisely because you provide them exactly what they need. So you can increase your overall profit even though your number of clients is down. And you can keep those clients happier because you have the time to really satisfy their needs.
Cost control (few claims for insurance, cheaper hayseed for Zeke) coupled with higher prices coupled with client selection improve the ROI for your business, which puts more money in your pocket.
Unfortunately, most business owners are either scared by low price arguments or are afraid to turn down any client. These folks are trapped by their obsession with income. Like Zeke, they want more volume. This is an obsession a successful company will overcome as soon as possible. One way to begin doing that is to study your ROI very carefully.
Ask yourself questions like:
- Which clients do the most business with me?
- Am I providing those clients with exactly what they are asking for?
- Which clients do I most enjoy working with?
- How much do I make from each client over the entire time they work with me?
- How much does it cost to get a new client?
- Am I getting the most value from my suppliers, employees and service providers?
These questions help you begin to see a path from your current business model to one with happy, satisfied clients and more profits and less hassle for you.
Want to know more? Why not schedule a free, no-obligation phone consultation and I can answer your questions. Just CLICK HERE to see my schedule and pick a time convenient for you.
In the meantime, leave a comment about how you deal with price pressures?