Tuesday, October 04, 2005
Make sure your right pocket knows what your left pocket is doing
I saw a lesson in pricing today. A reseller who holds his prices down to ridiculously low levels over his wholesale price has succeeded in driving other resellers to stop carrying the supplier's product.
But at what cost has he done this? Let's say he's made $1500 in sales. Chances are, he's excited over the $1500 he's put in his pocket. But I'm guessing he's completely forgetting that he's pulled over $1250 out of his other pocket to pay his supplier. Then figure he's spent a couple of hundred dollars more for pay-per-click advertising and he's left with maybe $50 profit—IF his pay-per-click advertising is converting at a good rate.
Now that's OK for a hobby. But it's not a business.
The mistake is an easy one to make. It's a lot easier to see those dollar signs coming in. Each sale catches your attention in a big way. Meanwhile, the payments going out are almost invisible as they get charged to that credit card automatically, without any need for the reseller to even notice.
But the money going out is just as real as the money coming in. And eventually, when the reseller has to put the two figures together (like at tax time) comes the big shock—that he's made nothing at all.
So what if he suddenly discovers that he's been working for nothing? In the meantime he's hurting the established resellers who give up on the product rather than getting pushed into prices that no resellers can make a profit on. And he's cutting his supplier's throat by driving other resellers away from the product and then, eventually, opening up a big hole in the supplier's marketing when he finally realizes that he's working for free and folds up his business.
It's sad, but it just goes to show the need to keep track of ALL money coming in and going out of your business, or you'll get caught by surprise.
Jeff
I saw a lesson in pricing today. A reseller who holds his prices down to ridiculously low levels over his wholesale price has succeeded in driving other resellers to stop carrying the supplier's product.
But at what cost has he done this? Let's say he's made $1500 in sales. Chances are, he's excited over the $1500 he's put in his pocket. But I'm guessing he's completely forgetting that he's pulled over $1250 out of his other pocket to pay his supplier. Then figure he's spent a couple of hundred dollars more for pay-per-click advertising and he's left with maybe $50 profit—IF his pay-per-click advertising is converting at a good rate.
Now that's OK for a hobby. But it's not a business.
The mistake is an easy one to make. It's a lot easier to see those dollar signs coming in. Each sale catches your attention in a big way. Meanwhile, the payments going out are almost invisible as they get charged to that credit card automatically, without any need for the reseller to even notice.
But the money going out is just as real as the money coming in. And eventually, when the reseller has to put the two figures together (like at tax time) comes the big shock—that he's made nothing at all.
So what if he suddenly discovers that he's been working for nothing? In the meantime he's hurting the established resellers who give up on the product rather than getting pushed into prices that no resellers can make a profit on. And he's cutting his supplier's throat by driving other resellers away from the product and then, eventually, opening up a big hole in the supplier's marketing when he finally realizes that he's working for free and folds up his business.
It's sad, but it just goes to show the need to keep track of ALL money coming in and going out of your business, or you'll get caught by surprise.
Jeff
Comments:
Post a Comment
© 2005, 2006, 2007, 2008, 2009, 2010 Jeff Baas, One Stop Web Support
