Firstly, a very Happy New Year to you all. Let’s hope that 2020 proves to be a successful and prosperous one.
I promised you in December that I would write a series of posts about pricing. Mainly because it is the one area where most people get it wrong (me included) and is probably the one area that will have the biggest impact on your business.
In order to thrive any business needs to sell more than it is doing already OR to cut costs. Lots of people like to do the latter (a bird in the hand being worth two in the bush). The drawback to this approach is that there is only so far you can go before it gets very hard to make any more savings (the law of diminishing returns). However increasing sales is an open ended thing. The only limit is the size of the market you are in.
The way to increase sales is two fold, sell more to the customers you have whilst acquiring more customers. That means better marketing (to attract new customers) and better sales techniques (to sell more to those customers). But if the price isn’t right all of that will just increase your workload for little or no results.
Consider this: With a 30% profit margin and £30,000 overheads you will need £100,000 of sales to just break even and £190,000 to give a £27,000 profit (about an average wage). Increasing the volume by 10% will give you a profit increase of £5,700 (That’s 21%). However increasing the price by 10% will give a profit increase of £19,000. (That’s a whopping 70%) Why? Because the cost of production stays the same so your margin grows.
Even if sales volume dropped by 10% in response you would still be £11,400 better off and with possibly less workload (especially in a service role)
And if you are tempted to drop prices to increase sales then think on this: a 10% price drop to gain 10% extra sales would reduce profits by over £15,000. You would be earning less than the minimum wage!
Ok, so hopefully you are convinced. But what next? Well you could just try increasing your prices and see what happens, but if that’s too scary a thought, next week I will go through some of the basic psychology of pricing methods to give you a helping hand.