Jan 19, 2017 Pricing Changes Lead to Increased Profits for Small Business
In a previous post, I provided an overview of the role of business modeling in improving profitability. So in posts for the next several weeks, I will be providing examples of the kinds of insights business modeling provided and their impact on increasing profitability.
For a multi-location day care provider, the model showed that the key to profitability was to increase capacity utilization. When running the day care, almost all of the costs were fixed no matter how many customers they had on any given day. If a lot of people came in, it was highly profitable because the revenue was much higher but the costs were almost level. If they had few customers, the location lost money that day. This led to pricing changes so that customers had a significant incentive to sign up for a monthly service rather than a day at a time. Even though the monthly service was discounted, and provided the lowest cost per day to the customer if used for each weekday, it provided much greater revenue. In addition, the daily price was raised to discourage drop-ins. In this way the pricing was set up to incent customer behavior to be consistent with the cost of doing business.