As we gear up for another year, I was recently assisting a customer with his year-end business review. This customer has been in business for more than two decades and has successfully grown it. He “right-sized” his company during the recession, and it started growing again last year.

But there was one thing bugging him. From a profit standpoint, the owner was disappointed with how he finished the year.  He felt the business did not make as much as it should have. The salespeople were back to earning pre-recession commission and he was investing in his staff more, rewarding them with raises. Despite this, he didn’t see his business income tick back up—in fact, it was going backward.

Curious as to why this was the case, he and I did a deep dive into his business, and we discovered that his pricing model had not been updated in the past several years. His philosophy was, “it was successful before, it should be successful today.” And on one hand, he was absolutely correct. The pricing philosophy was a good one, but he didn’t realize that every year a business owner should check the pricing model.

We went through it and discovered that although his overhead and general administrative costs were right for his size, the percentage he was allocating to the pricing model was too low. We did the same thing with his marketing costs and again found that he was a few points low on his pricing model for this allocation. Labor and materials did continue to be factored in over time, so he was in good shape there. After going through a few more cost factors, I asked him a simple question: “How much money do you want to make at the end of the year?”

He was a little surprised by the question. “Let’s work backward from where you want to be with ‘pretax profit,’” I said—so we went back through the model and found where he needed to be priced.

He was surprised but thankful that we went through the model like we did. He really never had done this before, but it helped him understand his business much better.

I’m sure there are others out there with the same challenge. I’ve had the benefit of working with many customers over the past 25 years, along with some seasoned greats like Dave Yoho. This pricing model has stood the test of time for many businesses. The moral of the story is simply this—whether times are great, mediocre or especially tough, make sure you look at your pricing formula/model every so often. You need to make sure to adjust it from time to time. Profit isn’t a bad word—it’s what we need to take care of our customers, our employees, and ourselves!

Great Selling!

Editor’s note: To hear Joe Talmon, Dave Yoho Associates, speak at Fenestration Day on March 19 in Irvine, Calif., go to the Fenestration Day website to sign up.

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