You must be well aware of the profit margins available in your industry. Work out a pricing policy that makes the best of this and is at the same time competitive. Look at how your customers expect to pay. What credit terms will they want? What can you offer that will be a trade off for getting better terms than usual? Remember that new players have the least flexibility in waiting for money to come in – that is, they are the most strapped for cash. So, if it is you that is new, be innovative in looking for reasons why you should be paid early and at best up front.
Now look at the business process that you will need to have in place to chase your debtors and make them pay as near to the agreed date as you can. Who will do this chasing?
Finally think about the salespeople you are going to employ. These people are key to your early success if you need more than you to do the selling. It’s your business, so don’t give it away. If you accept this advice you are almost certainly going to have some sort of bonus scheme to get the salespeople selling what you want, when you want it sold. This is crucial. If you make it a straight percentage of sales, you could have problems with the price at which sales are made. Most salespeople will happily accept ten per cent of £900 rather than work hard for the ten per cent of the full price of £1000. Giving things away is much easier than selling them. You will have to explain that giving away ten per cent of the selling price is actually giving away 33% of the profit or even more. Work it out if you don’t believe me.
I have seen owners of businesses do very well by giving the salespeople incentives to achieve the gross margin – sales price minus the cost of the product or service sold – rather than the sales figure. That way the motivation is to sell at list price. This may be a more expensive sales bonus scheme but could easily earn its costs. If there is no share option to offer the people who are responsible for growing your business then they are going to be expensive. As usual it’s a trade off, but there is no point in being in business if you do not sell your products and services at a healthy price – so get it right.
