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How To Find The Pricing Sweet Spot

Tune in to customer needs and offer the right product at the right price point.

Entrepreneur

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While these may be challenging times to be a small business owner, tough times can create opportunities for business owners who are in tune with the unique needs and desires of their community. Offer the right product at the right price, and you stand to differentiate your business from the competition. Now may be an opportune time to carefully review your pricing decisions.

Given the challenging economic climate, you might consider offering special incentives or offer to bundle or package your products or services to enhance value for your clients. Perhaps you could enhance a particular product or service and create a greater demand. The goal isn’t necessarily to offer the lowest price but to establish a belief among your customers that they are receiving good value from your offerings.

Pricing Pointers

Pay special attention to these six points when pricing your goods or services:

1. Competition. Review the local competition (small and large) to assess pricing relative to yours. What is their strategy? Are they catering to a segment of your target market with more emphasis on a specific product or service? If it’s a product-related business, are they seeking to move inventory quickly by lowering prices? What kind of value are they providing relative to your business? By answering these questions, you can obtain a better understanding of how to distinguish your products or services from the competition.

2. Business Resources. Find resources for business owners in your community, such as chambers of commerce, trade associations or other local business groups, and consider becoming a member. Take advantage of any networking opportunities these groups may provide to gain insight from other business owners about “standard” pricing for products or services similar to yours.

3. Client Feedback. Feedback from your customers can be a tool to determine the right pricing structure. Consider speaking with them directly or conducting a survey to determine how they feel about the value of your products or services.

4. Supply & demand. Pay close attention to local supply and demand. If you are selling a low-supply, high-demand product, for example, you may want to consider incorporating this factor into your pricing and charge a higher, more competitive price.

5. Market. Review your local market to determine which items are moving and at what pace. Are the best-selling items more or less expensive? Consider whether your business should carry more items appealing to a large segment of the market or focus more on a specialised sub-segment of the market.

6. Cost. When calculating your cost of doing business, consider all of your expenses – such as materials, labour, transport and other associated overhead costs – then consider how much of a profit margin you are seeking. Would you be able to charge a higher price by distinguishing your business with exclusively tailored offerings, or would your business fare better by seeking volume sales with competitive pricing?

Re-Examine Regularly

It is a wise idea to revisit these considerations on a regular basis. By examining your pricing structure, you may find more efficient processes in which to do business or perhaps learn of new resources that can reduce costs while improving the quality of your products and services.

By evaluating your pricing structure – keeping the evolving needs of your community in mind and adjusting it to meet the demands of a fluctuating market – you may discover new opportunities, all while increasing sales for your business.

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How to Guides

When Do You Know It’s Time To Sell Your Business

Five telling signs.

Andrew Bahlmann

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Even though running your own business gives you many freedoms, everyone still has those days or even weeks of wondering, “Shall I stay or shall I go?” Sometimes this thought becomes persistent instead of a passing phase – and for your own financial future and that of your business, you need to be able to recognise signals that mean the right moment has come to consider selling your business.

This is never an easy decision, especially as the amount of stress and constant pressure that a business owner contends with will play havoc with the decision-making process.

Having engaged with hundreds of business owners over the years, we see the five most solid signals that prompt them to sell are:

1. Retirement

This is the single most common factor influencing the decision to sell a business. Whatever age you have chosen as your retirement goal, if you are approaching this then give yourself an opportunity to assess both the benefits and challenges of having your own business.

Have you considered an exit strategy, such as hiring someone else to run the business instead of you? Or, as in many cases, does your business represents your most valuable asset? In this case, it would need to be cashed out at some stage as this would represent your pension. Selling your business successfully and fetching maximum value could well be critical to ensure that your retirement is well supported by financial surplus.

Related: Selling Your Business To Your Business Partner

2. Lifestyle Change

Growing a business can be an infinite journey. Have you reached your goals with this business and do you have the appetite for the ‘next chapter’?  Or do you want to move off into a completely new business direction? Perhaps you would prefer to follow a passion of yours or spend extra time with your family, investing more time in yourself and them to counter the massive investment of time and energy that you have made over the years.

3. You are ‘gatvol’

We often underestimate what it takes to live life as an entrepreneur and the amount of compounded pressure we ‘on-board’ over the years. Whether it is customers, suppliers, staff or the banks, you know this stress has reached a decisive, even destructive level if you can’t shrug it off and instead you find yourself repeatedly saying, ‘Enough is enough!’

4. Building a business versus running a business

Go back to the beginning of when you started your business. Do you remember the passion, fire and motivation that drove you to achieving your first sale? How about that sense of achievement as you hit the subsequent milestones? All that represented the very DNA that you have as an entrepreneur – but as your business grew, so did everyone and everything you need manage on a daily basis. Do you find yourself being more of a human resources manager than that entrepreneur with that fire in your belly? Is running a business enough to motivate you and drive your core DNA?

Perhaps this is the signal for you to sell the larger business that you have developed to someone with the skills and interest in the administration it requires. Selling your business would free you up to apply your entrepreneurial skills in a new context.

Related: When Is The Right Time To Sell Your Business?

5. You can’t do it on your own

In many cases you may still have time and energy to keep growing your business – but you may recognise that you are not willing and able to do this yourself. Sometimes you would appreciate a ‘big brother’ who can share the load. This could equate to a partner injecting money into your business, taking on some of your risk or opening up new opportunities for you and your business. This has become more and more prevalent in South Africa with the BEE codes and pressure on certain industries. Bringing on the right strategic partner to help you navigate uncharted waters is a critical step to take in your eventual exit strategy.

Decoding the signals that suggest it might be time to sell all or part of your business means that you will make the right decisions to stay or go based on sound reasoning.  Remember that this is one of the few times in your life that you truly get ‘one shot’ to get it right.

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How to Guides

Selling Your Business? How To Exit In Style

Gary Palmer, CEO of Paragon Lending Solutions runs through some practical requirements to realise the best value possible when selling all, or part of your business.

Gary Palmer

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Preparing to sell a business you have put years of work into, or even built from scratch, can a be a daunting prospect. Aligning the disconnect between what you think it’s worth versus what a buyer is prepared to pay is just one of the challenges. 

Act like you’re on the market – all the time

Like the Scout’s motto says: Be Prepared. A business owner needs to make sure their business is sale-ready at all times. Not only will this save a heap of administration when you do want to sell, but also means that, should an excellent offer land on your desk, your business financials and compliance issues are well in hand.

Related: Looking to sell your business? What do I need to know?

A business must be able to show a clean set of audited financials as well as up-to-date management accounts. Your accountant will be able to help get these in order if they aren’t already.

Make sure you aren’t running personal expenses through your business. This can be a challenge for some small businesses. Despite the allure of minimising taxes by running private expenses through the company books, it poses significant risk when preparing clean financials.

Prepare a due diligence pack. This can be provided by your auditor or financier and will include a list of your current contracts, VAT and SARS clearance certificates and defendable cashflow projections. Having all the documents required for a due diligence in one place that is easily accessible will go a long way to cutting down on the time it will take your prospective buyer to assess the company’s value and future potential.

It’s also important to remember that assembling all the necessary documentation takes time. It’s better to begin the process well ahead of when it will be needed. It’s also quite possible that a potential buyer may put a premium on the buying price if they know they are walking into a business which is clean, up to date and has no unexpected auditing or compliance skeletons in the closet.

Consider all the angles

Business owners opt to sell their business, or part of their business, for any number of reasons. This could be in order to retire and live off the proceeds, or because they want to raise money for another business opportunity. It’s important for owners to remember that there are associated expenses and even delays that they should plan for.

Before any negotiation begins, a business owner will need to find the right buyer. There are a number of brokers and financial service companies who can help source qualified potential buyers and, unless you have an offer on the table, it is a good idea to work with a third party to get line up a few credible potential buyers.

Once the deal has been negotiated and you have settled on the price, you must factor in Capital Gains tax. It is sensible to have a good idea of this before negotiations begin and to work out your asking price accordingly. Other expenses may also impact what you walk away with, including professional fees for your lawyer, auditor and other consultants with whom you have worked during the sale. You should also plan for delays due to valuation debates and requests for supporting documentation which may take time.

Related: Selling Your Business To Your Business Partner

Finally, it is always a good idea to consider whether you want to walk away immediately after the sale. Many business owners choose to stay on in operations, and by doing so can negotiate a more favourable price with earn-outs attached to the sale price. After all, you are the person who knows the business best and has a relationship with your clients – and this insight comes with a value attached.

Most importantly, if you are planning to sell your business, it’s a good idea to have advisors and partners who have been through the process many times and are able to help you navigate what may be unchartered waters for the first-time seller.

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How to Guides

When Is The Right Time To Sell Your Business?

Of the 6 most common questions I get asked on a regular basis, when is the right time to sell is by far the most common. The mergers and acquisitions game is part art, part science and a whole lot of elbow grease.

Andrew Bahlmann

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Your personal context

  • How old are you?
  • How much energy do you have left in your tank?
  • Have you extracted value out of the business already?
  • Have you managed to de-risk yourself by investing in equivalent assets outside of your business?

Only you can answer these questions, but they will go a long way in providing clarity for you and your ability to take the first step to selling your business?

Is your business ready to sell?

If I had R100 for every time someone had said to me that they want to wait another twelve months before they sell, I would have accumulated a substantial amount of money. Despite what the majority of advisors say, there is very often no real need to ‘dress up’ your business for sale.

Related: Selling Your Business To Your Business Partner

Don’t get me wrong. You need a going concern that delivers solid returns to catch the eye of the right acquirer. However, who are you dressing your business up for?

If you do this properly, you will have more than one buyer at the table. Chances are, what is attractive to one buyer won’t necessarily be attractive to someone else. It is impossible to be all things to all acquirers.

You say you are just 12 months away….

12-months12 Months is a magical number. Business owners always seem to be 12 months away from being ready to sell their business. Maybe it’s that big contract you are hoping to land. Perhaps you want to put in a new IT system. There will always be something.

Speaking from experience, I had a client that was going to wait, but instead committed to the process. Had they waited 12 months they would have been hit with ‘Nene-gate’, Brexit and Trump all in a 12-month period! There is no way that anyone could have anticipated a trifecta like that. I had another client that put in a new SAP system in those 12 months and the acquirer used Oracle!

You will reach the 12 month point anyway…

With the time that it takes to complete a successful transaction there is a good chance that you will cross that threshold of that big contract that you were hoping to land, putting that succession plan in or whatever the reason was that you wanted to delay the process for.

Something else that generally ruffles a few feathers, is that selling the (proven) potential generally fetches a far greater value than the past. This in itself is a whole other topic, but in the context of when is the right time to go to market, always keep this factor front of mind.

Related: 4 Essential Steps To Take To Successfully Sell Your Business

What is happening in the economy and your industry?

We are fortunate to have seen an increased sentiment in, and around, the South African economy in 2018. There is an uptick in international interest, but you know what the reality is, it never really took a major dive. The reason being that irrespective of the economy or your industry, good businesses sell. Some of my best deals happened in 2016 when the economy was under severe pressure.

Remember that when times are tough, acquirers need to buy good businesses to grow, as their own profit and be under pressure. When the economy and your industry is doing well, acquires will buy as they have excess cash to invest and will have a more bullish outlook on taking risk in their investments.

Truth is….there is no perfect time

The one thing that I have learnt over the past few years is that one can theorise for months trying to think of endless ways to increase the value of your business. Without climbing into the market and actually determining what your reality is, you will keep delaying your decision to take your business to market.

There is only one real hurdle that needs to be overcome, and that is you. If it is any consolation you will never be 100% ready. What have you got to lose? If you go to market and, worst case scenario, you don’t sell, you still have a great business to run and grow.

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