“If you don’t do it excellently, don’t do it at all. Because if it’s not excellent, it won’t be profitable or fun, and if you’re not in business for fun or profit, what the hell are you doing there?” – Robert Townsend
Time and time again entrepreneurs seek out my help because they are struggling to make a profit.
And, 99.9% of the time it’s not because they are not capable of creating a business that generates a profit. Rather, 99.9% of the time, they are looking at the wrong variables of their business that drive profitability.
The 3-Prong Profit Formula
Generating profit in your business rests on your ability to apply the following three part formula to it.
Profit = Value + Demand + Pricing
Oftentimes entrepreneurs will nail one or two of the profit formula variables. But, profit only shows up when you nail all three. So, let’s break this down to get you on track to lasting profitability.
In a nutshell, the 3-Prong Profit Formula requires that you:
1. Offer a quality product or service that meets a need, solves a problem, or fulfills a desire (Value),
2. Offer a product or service that your target market is willing to pay for (Demand), and
3. Offer a product or service that your target market is able to pay for (Pricing).
The Meaning of Value, Demand, and Pricing for Profit
Sometimes I feel like I talk about the importance of value, demand, and pricing so much that you must be sick of hearing about it. That said, understanding the role the variables play in your ability to profit is so imperative to the success of your business, I really can’t stress these concepts enough.
How to Establish Value in Your Business
Providing value is the first variable in the 3-Prong Profit Formula. If you want to build a business that has limitless profitability focus on value above all things.
Being able to deliver value starts with making sure your products and services meet a specific need, solve a specific problem, or fulfill a specific desire (bonus points if it does all three). But doing those things is only the baseline measurement for providing value your customers.
If you really want to increase the likelihood that your business will reach its maximum profit potential, you not only want to meet that baseline standard, but you want to create value that extends beyond those things.
One way to create value that lends itself to maximum profit potential is to exceed your customer’s expectations. Ask yourself how your offering can benefit your customer beyond its most basic purpose, and see to it that they receive that benefit.
Another way you can create value is by creating an experience for your customer. Anyone can conduct a transaction, but creating an experience for your ideal customers requires a much better understanding of who your ideal customer is and what is important to them.
Creating an experience your customers can’t get anywhere else instantly increases your value, which translates into a better bottom-line.
Determining Demand for Your Offer
The second prong of the 3-Prong Profit Formula requires that people actually want to buy whatever you offer. If no one wants to pay for your products or services, clearly, you have a problem. This issue can’t be fixed by providing superior value alone. You can easily offer a product of high value that people simply will not pay for.
Let’s take, for example, the darling of branding and innovation – Apple, Inc.
Back in 1993, Apple released a PDA device dubbed the Apple Newton. Now viewed as a distinct precursor to the iPhone, the Apple Newton was literally the laughing stock of business. Priced at $700 and higher, people scoffed at the Apple Newton’s bulky shape and questioned its actual utility.
Apple stopped production in 1998.
So what went wrong? Why did the Newton fail so miserably while it’s refined and modernized counterpart, the iPhone, continues to be a raging success?
Simple. People were not willing to buy it.
In the early 90s, people did not see the value in paying $700 or more for a “personal digital assistant” that could achieve electronically what most people could easily do on their own. The 90s were the heyday of the leather bound daily planner, and that cost a mere $40 in comparison.
The Apple Newton was a high quality product that met the needs of a tech savvy professional on the go, but people just were willing to pay for it…yet.
If you’re going to reach your maximum potential for profitability, people must not only want what you have to offer, but they must be willing to pay for it too.
Properly Establishing Pricing
The third and final prong of the 3-Prong Profit Formula is pricing. Pricing is one of the areas that I see entrepreneurs struggle with the most. Very few entrepreneurs confidently charge an appropriate fee for their value.
This is because so many of us have wrong and limiting beliefs about money. And, in turn, those beliefs bleed into our ability to price our products and services for maximum profitability. If you ever plan to price your products and services for maximum profitability, you must establish a healthy money mindset first.
What you believe about money, and your right to earn it, will affect how much money you allow yourself to receive for the value you provide. Most struggling entrepreneurs simply charge too little for the outstanding value they deliver to their client’s because they undervalue what they do.
Don’t fall into this trap.
Establish a healthy, balanced money mindset, and match your pricing to your value so that you can confidently earn the revenue you deserve.
Practically speaking, pricing is both an art and science. Some people will tell you that pricing is arbitrary, and you should charge whatever you want. Others will tell you that pricing is determined your competitors, so look to them to set the standard.
I’m telling you it’s neither.
To develop maximum profit pricing you need to:
- assess the average monetary value of the results you deliver for your ideal customer
- assess your total cost of achieving those results for your ideal customers, and
- assess what your ideal customer will be able to pay for those results.
Once you have the figures for each of these assessments you will be able to easily determine what you should be charging for your products and services. When you price your products and services based on the outcomes they provide to your customer, your cost of production, and your ideal customer’s ability to pay, you will create pricing that your ideal customers will rarely object to.
NOTE: When I say that you should factor in what your ideal customer is able to pay for your products and services, I am not inferring that you lower the price of your offerings if your ideal customer can’t pay for them. Rather, I recommend you find a different target audience, or offer a lower value product or service that suits that target market. No matter what, you must always be able to recoup your cost of production and the value of your offering if you intend to be profitable. Sometimes that means you need a different target market.
Confidence and character go hand in hand with setting your prices. Always provide more value than your customers expect to receive, and do your work with excellence. If you do that, you’ll always be able to command profitable pricing.
Now, Let’s Recap
Profit = Value + Demand + Pricing
The formula for profitability is simple. It’s in application that entrepreneurs go askew. Today, I want to challenge you to look at your business and apply each variable in the 3-Prong Profit Formula to make sure you are sufficiently fulfilling the requirements of each one.
If you can do that, you will increase the likelihood of profitability in your business instantly.
Now, I want to ask you. Have you applied the 3 prongs to your business already? Are you missing any? Which ones? Are you struggling with how to apply this to your situation? If so, let us know about it the comments below. I’d love to hear from you.