Our business has applied a “net” and “gross” pricing system since the first issue of our first specialized trade publication in 1988 (yes, we’ve been around a while.) I started the pricing policy at the outset to solve a rather major challenge: I had absolutely no money when I started the business.
So, I set a pricing model where advertisers who agreed to prepay received a 25 per cent discount. I posted both prices on the rate sheet. Without a physical prototype, I managed to sell enough ads for my first issue to pay the printer and designer who (wisely, considering the fickle nature of the publishing business) insisted on receiving certified cheques before delivering their services.
Most advertisers took the prepayment discount, and the fact that I could sell these ads without a physical product validated there was a market for the concept. I guess I got enough right, because the early advertisers elected to renew, and I had a business . . .
Ultimately, the printer and other suppliers accepted more conventional business terms, and I reviewed the net and gross system. We didn’t require the prepayments for cash flow any more, but I thought it wise to keep the two price system in place, if only to induce more rapid payment (the discount now applies if payment is received within 15 days of publication, so the advertiser has the opportunity to check whether we’ve provided the promised services before paying.)
Over the years, salespeople and bookkeepers complained from time to time about the pricing model. Some clients felt that we were pricing deceptively — the sales reps would quote the lower net price on the phone, and the clients would receive the two-price invoice in the mail. Publishing peers also mocked the concept, saying it is excessively complex and advertisers would never tolerate such a pricing model.
So, a couple of years ago, we reviewed the policy. I realized we needed to make our invoices much clearer, and explain in them the reason for the policy, while confirming that we could always be flexible and understanding if special circumstances required a later payment. We developed the form in the image, which we now send with every invoice.
Then we tested our revenue flow from the clients who paid the extra 25 per cent for being late. We’ve never budgeted this revenue as income. I thought that the advertisers who might pay the extra sum would offset the few who never paid at all, but hadn’t quantified the system’s actual benefit to our business.
Then, on reviewing our annual numbers, we received a pleasant surprise. On sales volume of approximately $600,000, the gross payments less any bad debts or write-offs were generating an additional approximately $30,000 in revenue. In other words, we were collecting approximately 5 per cent on the top line because of the policy.
If you’ve been in business a while, you will appreciate that a 5 per cent revenue boost (with no additional costs) is nothing to complain about. Add to the fact that many advertisers strive to comply with the deadline, enhancing cash flow. With the clarifying documentation, the pricing policy is now totally and validly embedded in our business systems.
Yet “no one else does it” — and otherwise astute publishers seem reluctant to even go near the two-price system we use. That is okay with me. We are doing our own thing, systematically, and validated by the real numbers, so we are quite happy to retain a competitive advantage.
The question that comes to mind, however, is how often these systems exist in one business or circumstance and can be transferred to another. Sure, there are standard “best practices” but can you learn from the outliers in the business world, and discover systems and approaches which are both effective and inexpensive, and achieve the business goals you are seeking?
So this is my question for you. Do you have a business system in place you would like to share? If you are concerned about competitive advantage and don’t wish to share it publicly, I understand. However, while some ideas and models are worthy of secrecy, I think most business management and marketing techniques really can be shared. Certainly, in some circumstances, you may find the two-price model is effective for your business or practice in inducing prompt payment and boosting your bottom line revenues. But you’ll probably say: “This won’t work for me.” That’s okay. You can comment (anonymously if you wish) or email email@example.com with your observations.