It’s time to review your pricing for 2011. (newsletter sign up is at the end)
Welcome to 2011. Let’s look at something that may get your new year off to a very exciting and profitable start! …
Now, I don’t know whether, like me, you’ve been wondering in fascination at the savage discounting going on by retailers. From major retailers to the local boutique, it seems most have been relentlessly discounting their products and services over the Christmas/New Year period.
You can understand that they have to move stock. And in the face of tight consumer wallets and an explosion in online shopping from overseas websites with our strong dollar, they had to do something. On the other hand, you have to wonder if they’ll post any profit at all, let alone how they’ll fund next year’s stock.
It’s timely for ANY business to reassess their pricing strategies. Before you go over the cliff with the ‘lemming brigade’, make sure you are well aware of the impact that seemingly small price discounts (including the effect of not passing on cost increases in raw materials and overheads for example) can have on the viability of a business.
The results may well shock you.
Have a look at the first table below, reproduced from my Advertising & Marketing Manual of years back. It shows the devastating impact discounting can actually have on bottom line profits. It’s sobering. Often, it is much more than we would ever believe. Even with seemingly modest reductions.
For example, by running your eye down 30% gross profit margin column, and along the 10% price reduction row, you see a figure of 50% where they meet. This shows that a business with this GP and seemingly small discount would need to increase sale volumes by a MASSIVE 50% just to stand still in terms of profit!
The implications are mind numbing.
If that were your business, it doesn’t just mean you’ve somehow got to find a 50% sales boost. You and your people would have to work 50% harder, you may need to drastically increase stock levels – your machinery and equipment have to handle 50% more output – and that’s before you consider the hit on your cashflow.
And you make no more profit. In fact, if you ‘only’ achieve a 20%, 30% or 40% increase in sales volume you LOSE money.
What about the other side of the equation?
Is it crazy to think – especially now – that you could put prices UP?
You can just hear your sales people protesting loudly – “we’ll lose customers”, “our conversion rate will drop”, “you’ll go out of business” and “our competitors will have a field day”.
But consider this.
Again based on a 30% gross profit margin, if you put your prices up by 10% as demonstrated in this second chart, you would have to LOSE 25% of your customer sales before it would affect your net profit. And if you deliver good value, that simply is not going to happen.
My colleague in our UK office, Haydn Rowe is quick to back up this observation. And the UK economy is an economy that is really struggling.
Haydn, in an effort to provoke discussion, has raised this seemingly crazy prospect of putting prices UP … with CEOs in his workshops over the last 3 or 4 months. Yet, to his surprise, when he asked who had raised prices in the last 12 months, a large number said that they had.
And did they lose clients as a result? According to Haydn, the answer in the vast majority of cases was a resounding “no”. Some even confirmed they’d raised prices in the order of 5%, 10%, 12% and 15%.
The effect has been a dramatic, significant and immediate increase in profitability and improved cashflow, boosting reserves and allowing increased investment into the business.
Of course, you have to make informed decisions about price strategies. But the reality is, MOST businesses could put their prices up, but they fail to educate their customer base to the TRUE VALUE of their products and services. Instead, they simply promote their products and services as a commodity, leaving no room for price increases due to ‘cost creep’. And the reality for most businesses is that unaddressed ‘cost creep’ can be a recipe for disaster…
Do less work and make more money!
This actually gets pretty interesting when you look at the impact of a price increase. (Done judiciously and with value adding built in.)
From the table above, you can see that you could ship or supply 20% fewer products (or services) and actually be better off.
And again, you have to ask what are the chances that 20% of your clients would leave if you are doing a great job and providing excellent value?
Bottom line, the reality is that many businesses actually undercharge their true worth. We’ve uncovered this fact with countless clients in the past.
And when they muster up enough courage to increase prices, most discover that they keep their clients and continue to win more new clients – because they can afford to give great service, excellent value and go that extra mile.
Best Wishes
Chris Newton
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