Pricing Strategy & Break-Even Point

Welcome to what's your pricing strategy and break even points?

Get confident and clear with what drives profit it is a pleasure to be with you today.

I am Coco Selman, five time founder, impact investor and creator of the Force for Good Business system.

Today we are diving into one of the most important topics of creating a business of substance and scale.

You discover and define what your pricing strategy is along with knowing what your break even point is.

So let's dive in to this important topic.

Are you generating plenty of revenue but think still not paying yourself nearly enough?

Are you confidently telling an investor or partner your break even point?

Could you ask any member of your leadership team, marketing team or product team to explain your pricing model with clear confidence?

Today is a great day for you to step into this conversation about pricing and how it can impact the success of your company.

So what is a pricing strategy?

Your method for setting prices for your products and services?

We aim for three things, profitability, market share and customer satisfaction.

The second thing we're talking about today is your break even point.

The break even point is when a business's total revenues equal its total cost and it results in the moment where you are at break even.

You're no longer in the red, you are now at zero.

And every time you sell another product or service, that revenue goes straight to the bottom line.

In this context, we don't think about it in terms of total revenues and total cost.

We think about it in terms of gross profit and operations expenses.

When those two things come together and are the same, that's when you hit break even.

So it's important to know at any moment how many products or services you need to sell to break even on a given month, even a given week, certainly in a given year.

And that helps you to manage and see quickly where you are and where you are above break even.

So let's dive into pricing strategy a little bit more.

So again, it's this blend profit, customer satisfaction and market share.

The goal is to identify the optimal price for each of your products and services, balancing revenue, demand and competition.

You could get to break even faster if you set your price higher.

But does that mean that you will put yourself in a awkward competitive situation?

You don't want to be totally overpriced unless you have a reason to do that.

You also want to include in your thinking the production costs, the competition, market conditions, the positioning of your brand.

Are you positioned as the exclusive top end player with very bespoke services or are you positioning yourself more as the get it up and running fast simple, easy, lower cost solution.

So your positioning matters when it comes to strategy for your pricing and your perceived value.

I invite you to step into this idea that you can price with absolute clarity, not apology.

Pricing strategy is a thoughtful way to create profit.

Profit is the fuel of every successful business.

Profit fuels purpose, growth and prosperity.

Sometimes early on, we price ourselves low to get more sales, but then the revenue isn't producing enough profit.

We have to sell, sell, sell, sell, sell in order to achieve break even and beyond.

So the right pricing strategy funds the future you and your company are meant to actualize.

So there's some definitions we want to make sure you know about as we dive into this conversation.

First, price simply it's the amount of money you charge for a product or service.

We usually think about this as a per unit price.

Revenue is the total amount of money a company receives from from its activities, primarily through the sales of goods and services.

This is before any expenses are extracted.

It is often referred to as the top line because it appears at the top of your income statement.

We're going to get to your income statement in a few minutes.

Next is the cost of goods sold.

So cost of goods sold is the cost for making, acquiring, producing or delivering your services.

This is how much it costs to produce it.

But it doesn't include all my operating expenses which are things like utilities and rent and wi fi and printers.

Right.

Whatever the delta is between your revenue and your cost for producing the product or service that is your gross profit.

Gross profit is an incredibly important number for you to be aware of.

Hopefully your gross profit is competitive to your competitors have a benchmark for what others costs are for cost of goods sold.

Sometimes it's about having a plan to reduce that cost over time as you start to produce more and more of your units sold.

So gross profit is calculated by subtracting the cost of goods sold from revenue.

And then you have your gross profit margin percentage.

This is the percent of revenue that exceeds the cost of goods sold.

It's calculated by dividing gross profit by revenue expressed as a percentage.

And then it'll help you develop your pricing strategy.

There's cost plus pricing where you add a markup to all of your production costs.

Where you come up with a particular percentage above the cost of production.

Value based pricing is where you have prices based on customers perceived value.

Competitive pricing is pricing in line with competitors.

Another is penetration pricing.

So you start with a lower initial price to enter the market and then over time you find ways to expand.

Lots of companies do that.

First hundred customers get this introductory offer and then the price goes up over time.

Premium pricing.

So high price for high quality or exclusive products, you might have some low barrier to entry products that are priced a particular way.

Then you have your premium products that you spend a lot more time and energy on, and those might have a much higher gross profit margin.

Think about how you want to position your prices for each of your products.

So make sure your pricing.

And this seems obvious, but it isn't always both profitable on a long term basis and competitive so that the price sits well with your authentic customers relative to the market that exists out there.

So the next topic here, break even, where your total revenues equals your total cost.

When you think about total cost, it's really your cogs, your cost of goods sold and your operational expenses.

And so rather than just try to add cogs and operational expenses up all the time, we think of break even is where gross profit is equal to operations.

And break even point is when the business's gross profit equals operations expenses resulting in no profit.

It's the point where businesses are neither making nor losing money on the bottom line.

It's the moment when your business becomes self sustaining.

So in other words, the revenue that you have is enough to cover all of your costs and keep going.

Maybe you can't invest in all the things you want, maybe you can't add new marketing or product development, but it's existing based on the current set of costs that you have.

And it's breaking even.

Every unit you sell beyond break even generates bottom line profit.

So that's what's so exciting about this.

Everything you sell beyond your break even point goes straight to the bottom line as profit.

So here is the income statement we've been talking about.

And at the top, of course, you have your revenues.

At the bottom is where you see your operations expenses.

But the top is your revenues, right?

So up here is how much you're selling.

And then you have your cost of goods sold.

And in this case it's $150,000 and your revenue is $500,000.

So it costs you $150,000 to produce your sales of $500,000.

And that leaves you with a gross profit of $350,000.

Then how much to cover all your other operational expenses?

All right, these expenses are things like accounting, advertising, amortization, bad debt, depreciation, employee payroll taxes, entertainment, insurance, miscellaneous rent, software, telephone, utilities, web hosting, vehicle expenses.

All those things are under our operating expenses.

I mean in this case, for this company, for the year, it's $258,500.

So that is how much gross profit you need to break even to cover all of your expenses.

In this example we have $350,000 of gross profit.

The total expenses or break even point is $258,500.

So that means you are above break even and therefore your income before taxes is 91,500.

So you are $91,500 above break even in this income statement.

I encourage you to take a look at your income statement and see, okay, where is my month to month and annual break even point?

And start to be really clear about how many units did I have to sell in order to cover break even and then to generate how many more units did I sell to create 91,500 of net income?

Today's focus is on these two core growth elements, pricing strategy and break even point.

They are one of the many core growth elements that make up the Force for Good business system.

It's two of the legs of the Force for Good flywheel and we are going to use a special tool to help you define your breakeven point and pricing strategy.

It's called the Pricing and Breakeven Calculator.

You can get it at a forceforgood biz weekly tool and it is free this week.

You can download it right now.

So why do you need this?

Without clear pricing and strategy, you risk underpricing and overworking.

You can't plan, invest or grow with clarity if you don't know your pricing strategy and you don't know exactly what your break even point is.

This is one of the reasons companies stay stuck in the survival stage and never make it to scaling.

All right, so where does this fit on your four page growth plan?

You're going to find it on the second page at the top.

And this is a area we refer back to with multiple master classes and tools because we are helping you analyze each of your products.

The price, the cogs, the gross profit.

And then over time you will continue to come back to this analysis of pricing strategy and break even point so that you can keep tweaking your pricing so that it helps you navigate and grow your company with prosperity.

So let's pull out the pricing and breakeven calculator and move right through it.

We're going to build your pricing model, estimate operating expenses, calculate break even and then we're going to make some observations, analysis and strategy so that you can go back into that section, page two of your four page growth plan and you can make some adjustments and have Some thoughtfulness about how you want to continue to grow your company.

So let's start part one.

Build your pricing model.

And this is where we go into the worksheet.

The table in part one is the same as the table that's at the top of the second page of your four page growth plan.

And it's where we walk through all these elements that contribute to pricing and profitability.

The first column is where you put the name of your product and then you focus on unit price.

This is the amount you charge the customer for one unit of product or service.

The unit cost is the direct cost to produce or deliver one unit sold.

Next is the unit gross margin in dollars.

This is the profit earned in dollars per unit after subtracting the unit cost from unit price.

So this is unit based minus unit cost is equal to unit gross margin.

Next you come across to the gross margin percent, the percentage of revenue that remains after covering unit costs.

So the unit gross margin divided by the unit price times 100.

And this will give you a percentage.

In the example we're showing on the screen, you can see that we've got three different products with three different levels of gross margin.

79%, 76% and 69%.

In your own worksheet, start to clarify if that's the right percentage.

If you want it to be higher or lower for any individual product or service that you offer.

That's about your pricing strategy.

Then we look at history.

We look at the trailing 12 months, the number of units sold for each of your products.

Then we look at the trailing 12 months, number of customers who purchased this product or service.

So you identify the numbers per product.

You'll probably find that certain products are earlier funnel items that generate more customers, but they're less expensive.

Your more premium products probably have fewer customers.

Then you're going to look at revenue and this is where you're going to pull the revenue directly from your income statement.

You're going to say for each product, how much revenue did I book?

Identify how much revenue comes in from each product.

Some products sell more, some products sell less, some are priced higher, some are priced lower.

So each one is going to have its unique revenue over the last 12 months.

Then we're looking at the average revenue per customer.

This is where you're taking the revenues from the previous column and dividing it by the total number of customers.

And this is telling you how much per customer you were generating in revenue for each product.

This helps you see what's really worth your marketing costs.

How much are you making per customer acquisition.

Every time you get a new customer over the last year for this product, this is how much you are getting in revenue.

Next, you're looking at trailing twelve month cogs.

So the last twelve months, how much were your cogs, your cost of goods sold, and this you want to pull also from your income statement.

This isn't just a calculation of the number of units you sold times the cost.

Because oftentimes you'll find that the real cost of goods is different than what you predict in the first few columns of your spreadsheet.

You want to go to your income statement and find out what your actual cogs were for the last 12 months.

Next is the trailing 12 months gross margin in dollars.

This is coming directly from your income statement.

It's the total gross profit for each product or service over the last 12 months.

This is the contribution margin.

This is how much per product you are putting into the business that's actually generating profit, that then you can pay your other expenses and generate long term profits.

So this is a really important number.

You want to see which products are generating the most contribution margin and over time you want that number to go up for all of them.

Certainly.

And the question then becomes, well, how do I affect my price?

Do I need to adjust my price to bring this on more?

Do I need to bring my price up so it just creates more profit?

Or do I need to bring my price down so that I can generate more sales?

And for each product, you want to have an idea of what your strategy is.

The last column here is the trailing 12 months gross margin percent.

And again, you want to do this calculation from your income statement, not from your predictions in the first few columns.

Unit price, unit cost, gross margin, et cetera.

Because you really don't know what your total gross margin is per product.

And overall until you look at your income statement.

It's the trailing twelve months gross margin divided by the trailing twelve months revenue times 100 gives you that percentage.

You can just see that there is varying amounts of contribution to the total gross profit that then fund the operations of your business.

So 79% total gross margin is coming from product one.

76% gross profit margin is coming from two.

And 69% total gross margin percent is coming from product three.

In the previous column, $2 million is coming from product one, 970, 975,000 is coming from product two.

1 million is coming from product three.

So now you've filled in the data on the table and you have the ability to sit with that and Figure out what to do.

Consider your cost, competitor pricing, perceived value, market conditions, and brand positioning.

Think about how you might get the most out of your pricing.

Do you want to make some adjustments in the first three columns so you can change the future of your last columns?

So let's go on to the next part of the Break pricing and break Even calculator.

Part two is where we estimate operating expenses.

This is all the expenses that need to be covered by the gross profit.

Here is where we are going to estimate operating expenses.

Look at your expense types.

I highly recommend you pull out your income statement and look at what's already there.

The first column of this table is asking you to list out all of your expense types.

Then you're going to look at data from the past 12 months.

Enter the actual cost for each expense type for the last 12 months.

Then you're going to look at year one going out one year from today.

And then you're going to look at projections for year two and year three.

And along the way you're going to make some assumptions.

So we were taking the information from the last 12 months and predicting how much our expenses are going to be over the next three years.

Part of this exercise is thinking about the last 12 months.

The last 12 months.

This is what we did in terms of our expenses and our plan is to improve this product line, invest in more marketing or hire this new employee.

As you start to lay out your future years, you adjust your projections for each year will be based on the assumptions.

Are you planning to buy more computers?

Are you planning to hiring more people?

You make assumptions for each year on how much you think it's going to increase or decrease for a particular type of expense year over year.

Expense types Rent or lease utilities the salaries, benefits and payroll taxes Insurance premiums marketing and advertising office supplies and equipment maintenance and repairs Travel expenses, professional fees, software subscriptions and IT support, depreciation of long term assets and research and development expenses for product innovation.

So you want to include all of these things in your expenses which are probably already in your income statement, in your chart of accounts, in your accounting software.

This is a great time to reach out to your bookkeeper or accountant if you have a cfo.

Perfect.

This person knows exactly what we're talking about and can do most of this work for you or help you figure all this work out.

Look at what you've actually done over the last 12 months and then look at what you plan to do in the upcoming three years.

In this next section of the pricing and breakeven calculator in part three is where you calculate break even.

Because remember, the break even is when your operating expenses are equal to your gross profit.

In the previous step, you'd calculated for each year last year, this coming year and the two years following what you expect your operating costs to be.

So that is going to help you see not just for this year or last year, but what your break even point is going to be as the years go on.

If your expenses are growing, then your break even point is going to have to increase to meet that level of new costs in your operating expenses.

Operating expenses are the costs associated with running a business day to day, excluding the cost of goods sold.

Now that you have projected all of your annual expenses, you can calculate how many units of product or service you need to sell.

So here we say total expenses from part two.

Write down the total expenses for the trailing twelve months along with your projected expenses for year one, two and three.

Then you're going to look for your trailing twelve month cogs.

And this is the total cost of goods sold for the last 12 months.

And you're going to want to calculate what it is for each of the years and then the total write down the total units sold and what you project it would be in the coming years.

And then you're going to have trailing 12 month cost per unit.

And this is where you're going to divide up total cost of goods sold by trailing 12 month total units.

That's going to give you your trailing twelve month average cost per unit.

That's an important number because that's the number you're going to use to calculate break even for each month.

Break even units.

Count the number of units you need to sell based on your annual expenses.

This is going to help you see how many products do I need to sell in order to break even?

Now part four.

This is where you've done a ton of work to figure out your pricing, your cogs, you've gross profit, your expenses and your break even point.

So now for last year and the next three years, you've predicted what your break even point is going to be.

This gives you the ability to make some predictions and adjustments in your pricing should you decide to do that.

So what is the product or service that has the most traction?

So that's the first question that you want to observe and analyze.

Write down which product or service are you selling the most number of units?

The second is which products or services is most profitable per unit?

Which products or services are generating the most dollars of gross margin every Time you sell a unit and then which products or services is generating the most profit to your business overall?

So it's that contribution margin.

Which product or service is generating the most trailing twelve month gross profit?

Profit dollars?

This product is actually what's driving your profitability.

It's helping you get to break even fastest, right?

The other products are not generating as much your contribution margin.

So take a moment and think about why that is.

Is it because of the pricing?

Is it because of the particular customers that buy?

Look at the numbers of customers that are buying it.

Are they 1 time purchases?

Are they 2 time, 20 time purchases?

Analyze what you're seeing here on the page.

What has driven results over time?

What has driven results over the last 12 months?

Is there a connection between marketing efforts, sales efforts, product or service availability?

Pricing competitive would have been the first factors and drivers of your results.

Was there less attention on some, more attention on others?

Upsell, cross, sell.

What are the drivers that tell the story behind why your numbers look the way that they do?

Why certain things sell a lot, why certain things sell less, why certain things contribute more gross profit?

And then what is your strategy going forward?

Is there some new way you want to think about your pricing?

Is there some new way you want to think about your costs?

Is there a different way you want to think about how you upsell or which products you keep, which products you don't, and how you upsell from one product to another?

And what overall could you do to drive more profit?

Is there some some ability for you to increase price?

Is there a benefit to a decreased price?

Is there a way that you can run an annual promotion on some product and create a new level of sales?

Take a moment and think about each of your products and your overall portfolio of products where you fit in the market among your competition in terms of quality, price and ease.

Given all of that, what are the best levers within your pricing structure and your cost structure that can help you squeeze more juice from the orange?

Squeeze more profit per unit you sell?

Now you have gained so much clarity.

You've discovered a lot about your profitability.

You see what's fueling profit.

You've defined where you're making and losing money.

You've identified your business's true break even point and you've looked at it over time.

You've looked at it in the past, the future and your plans or the investments you want to make and how that will affect your break even point.

You've recognized what you want to scale, what you want to drop, what you want to invest in.

You've looked at your pricing to see if you want to reconfigure it.

You've looked at your costs to see if there's anything you can do to reshape your costs.

All of this gives you the power to reclaim power over your growth model.

And just remember, you can serve at your highest level while serving starving your business.

Now you're going to go back to your four page growth plan and on that second page at the top of the page where you list out your products and services, this is where you want to reflect on any changes in pricing strategy that you'd like to make and allow that pricing strategy to be reflected in these numbers.

Okay, so next you want to identify a clear habit.

A high leverage habit is a weekly or monthly habit that ensures you track, assess and refine pricing and profit.

So what would be a weekly or monthly habit that would keep you and your team, your leadership team, your product team, your marketing team, with your pricing strategy and break even point?

I recommend that you review your units sold per week, every week, and calculate your way to monthly break even on a monthly basis.

How much is my expenses and how many products do I need to sell or how much revenue or gross profit do I need to generate and where am I in that calculation?

So I used to think about this at Illume.

I used to think about one particular product line as being my bread and butter product line.

And that was the product that I focused on break even.

And so I focused on how many hours do I need to book and deliver and bill and collect each month in order to break even?

We always had a certain number of hours, which is units, service units that we needed to cover every month's break even.

And so along the month we would look every week and say, okay, how many units have we cleared this week and total this month?

And where are we on our journey to break even?

Where are we on our journey to making sure that all of our costs for running the business are covered every week?

Second, we did a monthly review and margin review.

This is essential.

It's part of looking at your income statement and seeing where you are in terms of break even and how you could improve your overall profitability.

I encourage you to have a quarterly pricing strategy meeting.

Put it in your calendar with all the contributors who are part of that pricing conversation.

Meet with them once a quarter, look at your data, your trailing 12 months, pull out this worksheet and build the model with the trailing 12 month dollars numbers and find out if you are meeting your strategy and see if it's working.

If it is, great, keep going.

If it's not, tweak it.

You can also do a quarterly TEA report on top, middle and low performing offerings and think about how you can improve each one's profitability with all the levers you can pull.

It also might be that there's some things you want to let go of.

You want to say, you know what, we're done with this.

We want to instead take our dollars that we're spending on marketing and sales and and revert it to another product that we think will have better results and therefore better margins overall from that quick or break even track and review.

Break even sales progress weekly and monthly until you are at break even.

You need to be thinking about break even every single day.

It's the life force of your business is to hit breakeven and go beyond it.

And if you're well above it, you.

You know this because you did it, I'm sure.

And now it's time to continue to look at those units sold each month to increase your prosperity and also think about whatever it is you're investing in as your expenses go up or down and how you can continue to enrich the business.

You can't buy freedom with revenue alone.

You earn it through profit.

And profit starts with break even.

Identify a single high potency action.

What's one thing you can do this week to improve your pricing and profitability?

What can you do this week to help you break even more quickly and boost profitability per unit sold?

You can eliminate low margin products.

You can raise prices on your best sellers.

You can invest in improving the most profitable offers.

You can train sales team on high margin value based pitches.

You can launch a pilot offering with premium pricing.

You can implement a system to track weekly and monthly break evens.

So I encourage you to find one core action you can take around all of this.

Founders who thrive don't just know what they sell.

They know what it costs, they know what it's worth and they know what it earns.

Today we did a lot.

You defined your pricing strategy and your breakeven point.

You used the pricing and breakeven calculator, which is a perfect tool to come back to on a quarterly basis with your team and see where you are on your progress.

You've integrated new pricing into the four page growth plan.

You've identified a new high leverage habit to make sure that you are looking at your profitability and break even every single week and every single month.

And you've committed to a high potency action to help you really foster this new pricing strategy into your business.

So break even isn't the finish line by any means.

It's the moment you take a look.

So next I encourage you, as I always do, to pick up your copy of the book A Force for Good and you'll find more information about pricing strategy and breakeven point in chapter six.

And you'll get all of the tools of the Force for Good toolkit when you buy the book and you can find the book at a ForceForGood biz book.

Sign up for the Force for Good tool of the week and get it at forceforgood Biz Weekly Tool.

This is where we send out one tool a week.

It's free for one week.

I encourage you to consider our Growth accelerator.

This is how you can put all these tools together along with the important weekly and monthly rituals that will help you get all the way to a system of exponential growth.

The Growth Accelerator helps you build your flywheel so every year you can double your impact and double your profit.

It includes videos, tools and assessments to help you craft your plan.

It also involves your team, helps you connect with your team and build those rituals together of meeting and really helps solve that puzzle of growth.

It's offered at a very affordable price, starts at $599 and you can get it at A Force for Good Biz Flash Accelerator.

Thank you joining me and being a part of this important conversation on pricing strategy and break even.

Hopefully you have tucked in all kinds of kernels of wisdom and are ready to go and build a business that is both sustainable and incredibly profitable.

The world is made better by women led business.

So let's all go make the world a better place.