SECTION 4 – Cost control and metrics
Is your business reactive to legislation, competition, outside influences, not knowing where your next customer will come from? For most centre owners’ life can be hard work, reactive, stressful and long hours with little reward.
The main cause is pricing – not charging enough for the services your customers receive. You will have demanding customers who all want different things at all hours, and you strive to meet their needs. You should charge for this accordingly. Think of a 4-star hotel whose room service charges are a multiple of their bar/restaurant prices. Extraordinary service warrants a high price and your customers won’t mind paying for it because they are getting value for money. If they won’t pay, they cannot afford you!
To maximise profit, owners and managers must focus on:
- Profit analysis and cost control – charge for what you do
- Have pricing policies and strategies to deliver the profits required.
- Interrogate sales and marketing performance – missed and failed opportunities for professional services
How much is your time worth?
Very often owners ‘give away’ time as a favour, or because the customer is a ‘friend’ or because they are a long-term customer, so they are reluctant to ask for more money. It is important to understand the value of your time.
Most owners work too hard, for too many hours for too little return. One of the main reasons outside of the cost control and cash management measures on previous pages is not charging enough for their services. Local businesses are in competition with each other and often monitor each other’s pricing worried about putting up their prices because they will become too expensive.
This is a fallacy and is a highly dangerous policy which must always be avoided. If you chase your prices down, knowing that your costs will always increase, there is only one direction your business is going.
Customers will pay for value and a good experience regardless of the cost comparison. In fact, being expensive can be positive and a key differentiator because it promotes that you are one of the best the best (assuming you are of course)!
Quality and luxury goods and services thrive on attracting only those individuals that can afford them or want to be associated with them. They may not necessarily represent value for money to everyone, but the client experience is always top class. Likewise, the cheapest service may not represent the best value. Take for example the cheapest insurance policy but when making a claim it can be near on impossible and all key items have been excluded anyway. You get what you pay for!
A good way of setting a pricing strategy is to work out your break-even point. If your pricing means you will never make a profit, then reduce costs and put your prices up. Cost management can only go so far, and a useful maxim is “you cannot save yourself rich”. Increasing your prices will mean you have to provide added value for money (not your time for free) and improve the customer experience. If you reduce your costs and put your prices up, you will make money. If you make money you will be less stressed which means you have time to plan, which means your business will improve and you will have more time on your hands.
Income bands that you examine in your management accounts can be increased so you can monitor and compare using your metrics to indicate where and how pricing needs to change. So, you might have multiple livery services, multiple extras charges, multiple riding lesson options, multiple competition entry types, multiple riding club groups. You could have dozens of different services that you offer, and each must be carefully considered.
For example, if you charge extra for a livery customer to turn out their horse for them work out how much time this takes and who does it. – so if a yard manager is paid say £10 (gross) per hour takes 15mins of their time (inc the time to get to the stable, change a rug, put on head collar, walk to the field and back, put the headcollar away and get back to their workplace) it has cost you £2.50. The customer should be charged £5.00 for this service as a minimum. If the paddocks are a long way from the yard, it might take 30mins, so the cost to you is £5.00 and the customer should be charged £10.00. You should apply this principle to every job that is carried out for every customer to set a charging rate. (Don’t forget to take account of VAT if applicable).
It is worth mentioning that every price should increase every year by a minimum of the inflation rate. This should apply to every customer for every product and service.
What is the inflation rate you should choose? UK inflation rate is only the starting point, but you need to know your Internal Rate of Inflation (IRI). For example, let’s assume most of the yard staff are on a minimum wage. Over the last few years, minimum wage has risen at 4-5% per annum and we know that most of our costs are on staff. Feed and bedding costs can vary greatly from year to year and can be influenced by meteorological conditions and political decisions (Brexit?) Owners can do nothing to influence these factors but can and should react to them in their pricing reviews
As a simple illustration, taking our staff costs alone and UK inflation at around 2%, if prices were increased by only 2% the business will be losing about 2.5% year on year if it failed to respond to the internal rate of inflation. Over 10 years this would have a compound effect on income of over 28% lost income. So, if your livery fees were £100 ten years ago with no price increases, they should now be £155, just to keep up with 4.5% (IRI).
Correct pricing will increase your revenue and your margins. In the example above, if the owner suddenly increased their prices by 55% probably a large proportion of their customers would leave! If the price had been increased by 4.5% per annum (as a minimum) most customers probably would not mind, or not even notice. Owners may face some queries from a small percentage of customers and would expect to do so. Better that than go bust! If you are also increasing standards and the value proposition owners will lose NO customers UNLESS
- Standards and quality of service declines
- Customers are not informed of the price increase and the reasons behind it
- Prices are concealed and hidden by poor information
Set out your fee structure knowing you WILL make a profit. Make sure customers and staff are clear about the costs that will be charged and why (including your extras, cancellation and termination policies). Do not give your time or staff time freely. Discounts should be avoided unless planned and calculated accurately. Charge for everything the business does keeping accurate records so any queries can be answered promptly and decisively.
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