A Broken Business Model: Wringing More Money Out of Your Best Customers Is Not Sustainable
This image illustrates so well the folly of our more than century old pricing model. All was good until the market changed about 30 years ago. Because we didn’t know anything else (and neither did our advisors) our response to the growth in cremation has been to beef up our burial prices and focus on merchandising with the resulting effect that we are only wringing more money out of our best customers. And our best customers are saying “ENOUGH!”
Beginning with the global economic debacle of 2008 the cremation rate has accelerated. The hardest hit have been (surprisingly) the rural communities where cremation has in, some instances, jumped from the mid 20% to as much as 50%. One of my funeral home consulting clients recently told me:
“It’s not that my families want cremation…they just can’t afford burial.”
The Fault Is In The Pricing Strategy
For more than 100 years the standard pricing strategy in business has been what is known as “Cost-Led Pricing.” And it is this pricing strategy that has prevailed in DeathCare since the Mid 1800’s. Only last month I read an article in one of our trade journals once again advocating this outmoded strategy.
Cost-Led Pricing works this way:
To calculate your prices using this method is relatively easy. You only need to know a few things:
- Your overhead
- Your anticipated call volume
- The amount of profit you want to make
- Your marginal contribution on merchandise sales.
So, let’s pretend we have a 100 call funeral home that has merchandise sales that look like this:
Units Cost Markup Retail Revenue
Caskets 75 $1,100 2.5 $2,750 $206,250
Vaults 50 $800 1.85 $1,480 $74,000
Mdse rev $280,250
cost of sales
Total COS ($122,500)
Contribution To OH $157,750
Once we have estimated our merchandise contribution to overhead we tote up our budgeted overhead and tack on our hoped for profit to determine overhead plus profit.
Desired profit $50,000
Overhead Plus Desired Profit $495,000
Less contribution from Mdse sales ($157,750)
Overhead and profit less mdse contrib. $337,250
Full Service Charge $3,372.50
Our final steps are to reduce the overhead plus profit number by the estimated net contribution from merchandise sales to calculate an estimated net amount to be recovered from our service charges and then to divide that by the estimated call volume for the coming year.
Here’s The Problem:
When I work with clients I ask rhetorical questions to help them start thinking for themselves. In this case my question would be: Who is missing from this equation? But I won’t do that to you.
If it’s not obvious to you the problem here is that the consumer is excluded from the conversation and consumers are never excluded from the conversation...for long. They always have a vote and right now they are voting with their checkbook.
Worse is the second problem:
Cost-Led Pricing strategy enables you to ignore the Sins of a bloated overhead and assume the unconscious laziness that avoids the constant search for the necessary efficiencies all businesses must continually seek.