Business profitability never goes fully according to plan. Sales numbers might fall short. Materials and supply costs could increase. New regulations could require you to alter your product. To overcome these common but unpredictable scenarios, you’ll need to maximize your profits and efficiency to build a solid long-term growth strategy.
What you need to know
- Costs are divided into two categories: fixed and variable. Fixed costs are
easy to budget, while variable costs fluctuate based on market conditions. - Choose the right pricing strategy, retain customers, embrace innovation, outsource services, and hire accounting professionals to ensure financial success.
- Launching innovative products can lead to financial success, but can also lead to failure if you don’t understand the relationship between profit and innovation.
Understand fixed vs. variable costs
Costs come in two categories: fixed and variable. Variable costs are expenses that change each installment, like materials and supplies that get more or less expensive based on market conditions. Fixed costs include salaries, rent or leases, insurance payments, and any loan repayments for which each installment is the same amount.
Not adjusting strategy to anticipate and cover rising variable costs is a common stumbling block for startup owners, particularly those who use a short-term profit first approach.
Pricing strategies for small businesses
The two overarching pricing strategies for startups are value-based pricing and competitive pricing. Value-based pricing is based on what you think customers are willing to pay, while competitive pricing is based on what your competitors are charging. You may employ both methods when pricing your items.
Some more specific pricing strategies to consider include:
- Price skimming: Set your prices as high as you think customers will tolerate and slowly lower them over time.
- Cost-plus pricing: Add a fixed percentage to the production cost of each unit item.
- Penetration pricing: When entering a new market, set your prices lower than existing competitors.
- Economy pricing: Price your products cheaper than your competitors’.
- Dynamic pricing: Change your price to meet anticipated and observed changes in demand (also known as surge pricing).
Ways to grow your revenue
Growing revenue requires some return on investment (ROI). For startups, marketing ROI is often higher than the revenue received from new customers. If this is the case, you need to focus on a customer retention strategy so customer lifetime value (CLV) exceeds the original customer acquisition cost.
To maximize profits, set spending limits on customer acquisition and use cost-effective retention strategies such as loyalty programs and strong customer service.
Innovate for a competitive advantage
Developing new products can require several iterations of capital investment. If you’re not mindful, the development cost could easily exceed the potential profit. One way to differentiate your company from competitors is to create an innovative product and leverage it to increase market share. Research your target markets extensively, and look for white space opportunities.
Also, create a culture of innovation within your company. Encourage your team to share ideas to improve your products or processes.
Financial management for startups
When you first found a startup, it’s natural to want to manage everything. While you don’t want to ignore your finances, the amount of wealth your business creates each year depends upon the efficiency of these processes. Hiring a certified public accountant (CPA) and/or an experienced bookkeeper can help decrease costs and increase your company’s purchasing power.
An accountant or accounting team can help you to lower the cost of goods sold (COGS), take advantage of low interest rates when they’re available, purchase supplies in bulk, and boost profit margins.
Strategic outsourcing
In the startup phase, outsourcing certain tasks is more cost-effective than doing them in-house, as you’ll save on payroll and office space, but you’ll lose over these operations. For example, if you ship your finished products using a third-party distributor, you can save on the cost of warehouse space. Certain professional services, including accounting and bookkeeping, can also be outsourced.
Marketing and brand budgeting for startups
Marketing your products or services allows you to acquire new customers and boost revenue. Presenting a brand identity that’s synonymous with quality is necessary to securing repeat business and turning customers into brand ambassadors.
Don’t ignore marketing as an expense. If potential customers haven’t heard of your company or don’t trust your brand, you won’t sell as much product. Invest in creatives who can outline a brand identity and eye-catching campaigns.
Regulatory and tax planning
Hiring an attorney to keep track of state and federal regulations can help you avoid penalties for non-compliance. Having an accountant who’s well-versed in tax optimization can reduce your tax liability. Making mistakes in either of these areas will cost your business severely, so it’s usually cost-effective to hire someone to do those jobs, either in-house or through an agency.
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