Business owners are always looking for ways to increase their profits, or to keep more of what they earn.
There are two common ways that a business uses to try and generate more profit, which are:
• Increasing their sales volume
• Cutting costs
But there is a third and much more successful way
Consider a small retail business which turns over a modest £100,000 a year, with a gross profit margin of 40% (The gross profit margin is calculated as sales less cost of goods bought divided by sales) and other expenses of £20,000. The profit statement for his business would read:
Sales £100,000
Cost of goods bought £60,000
Expenses £20,000
Profit £20,000
If we follow our two most common profit improvement strategies mentioned above and change the figures by 10%, we’d get:
• An increase in sales of 10% would generate additional profits of £4,000
• A decrease in costs of 10% would generate an increase in profits of £2,000
Our two favourite strategies would add some bottom line benefit but involve a lot of hard work. After all, how hard is it to increase your sales by 10%, or cut your costs by the same.
As a third option, why not consider putting your prices up by 10%?
Just by putting your existing prices up by 10%, you could generate an additional £10,000 in profits. That’s 5 times the benefit of cutting costs and 2 ½ times the benefit of selling 10% more
I can hear the voices of dissent already saying “yes, all very well and good, but my customers would leave if I put the price up”. Ok, so maybe a proportion will, you’ll always have a price sensitive section of your customer base. BUT, if you increase prices by 10%, you can afford to lose 20% of your volume before you are back in the same profit position as you are today.
So, that’s 20% less work for the same money that you are earning now! That effectively frees up a whole day a week to do something else. Of course, you could use that day to bring in more business and be even better off!
The extra twist
What’s quite frightening is that during a recession, many businesses are looking at cutting selling prices, rather than putting them up. Did you realise that (using the example above) if you cut prices by 10%, you’d have to sell 33% more to make the same money as you do now. That’s a massive extra volume!
So how can you put prices up and stop customers leaving?…..differentiate, be different in your market place and price almost becomes an irrelevance
What are your experiences of changing your prices in the last couple of years?
Your breakeven point is that point in time when your income equals your expenses. Once you get past that point and your income exceeds your expenses, then you are making a profit. If your expenses exceed your income, then you are making a loss.
