Here is a 2-minute lesson on how to increase profit through pricing, and why you shouldn’t be afraid to raise prices!
Underpricing your service is a common issue with many small businesses, especially new business owners. (We talked about this here…see ‘Thing #8’.)
This is usually a primary cause of low gross profit margin which makes being profitable difficult, causing you to work much harder for much less…boooo! This also makes your path to growth more challenging.
When business owners think about raising their prices, the next thought is usually, ‘well what if I lose customers?’
You might. You might win less customers too. That’s not always a bad thing. Let me arm you with some information to consider to help you evaluate a price increase.
A quick important note…
Before we continue, let me say this – there’s a difference between predatory pricing and charging a fair price for the VALUE you provide to your customers. We are not telling you to ‘rip people off’. We’re advocates for providing amazing value to customers and creating a win-win situation for both parties. When your price exceeds the perceived value, you lose customers. Make sure your value exceeds your price. Let us continue…
Understanding the potential downside to a price increase.
As stated, this is to arm you with information to help you feel good about making a price increase. In other words, to eliminate the fear of potentially losing business.
If you understand how much business you can lose and still make the same amount of profit, you’ll reduce some of the fear of making this decision.
The below chart shows…
…how much your sales volume (number of sales transactions) can decrease…
…based on your current gross profit margin…
…and a given price increase (it shows between 1-30%.)
How to use the chart:
1. Find your gross profit margin across the top light blue row.
2. Pick a price increase in the light blue column down the side.
3. Find the intersecting number – this is how much sales volume can decrease while keeping your profit the same.
4. This is more of an important note, but this assumes the cost of goods sold or cost of sales remains constant and does not increase as your price increases.
For example, if your gross profit margin is 30%, and you raise your prices by 10%, you can lose 25% of your sales volume and make the exact same amount of gross and net profit.
At the same time, you’ve increased your gross profit margin from 30% to 36% (trust us on this math).
In other words, you can do 25% less work and make the same profit. If you lose less than 25% of your sales volume, now you’re making MORE profit, doing LESS work. Hopefully you’re making more profit doing the same work.
Here’s how to see this example on the chart…
As a final point, obviously losing business is not the goal here. If your perceived value exceeds your price, that should not become an issue. The goal of this article is to arm you with facts so you can feel better about making a decision to raise prices if appropriate.
Low gross profit margins cause you to work more for less and make growth more difficult.
Hopefully this quick lesson will help you figure out if it’s time to improve your profit by raising your prices, enabling an easier path to growth.
Questions? Want to know more?
Pricing can be a complex issue so if you have questions or would be interested in more information on this topic, use the comment box and let us know!
| Click to view our articles page |