Increase Price –v- Increase Sales – what to think about.
Pouring over margins and gross and net profit, a common theme is a belief that the way to salvation is through an increase in sales. However, in reality, profitability is driven by the ability to vary price and maintain control over costs.
No matter how hard a business tries, if it has increasing costs and is not able to increase price, then no amount of increased sales will lead to increase profitability – in fact, the business maybe simply increasing its loss.
But alas, I hear you say, “we cannot afford to increase our prices because then we won’t be competitive with our competition down the road”.
If this is really the case then some serious research needs to be done into the competitors to see how they are maintaining profitability. It maybe they are managing their costs better or else they maybe in the process of going out of business.
So, businesses need to differentiate themselves from their competitors so they are not governed by others’ price but by their ability to influence the market that they have a better product or service or something else that they cannot get from the competitors (competitive edge/competitive advantage).
One way of going about this is to develop a simple list of all the reasons why a customer would want to buy from your business. That is, what makes your business unique?
Alas again I hear you say, “but we sell the same goods as the guy down the road”. True, however, the answer may lie in exactly what you are selling – and that could be a million things:-
- the quality of your service;
- the after sales service;
- the way the store looks;
- the attitude of staff;
- the way the goods are presented and packaged;
- the quality of advice given by staff;
- the knowledge of products sold;
- product range; and so on.
Next, you do the same for the competitors ie. what are their strongest selling points? Once this is worked out, a business is in a position to play to its strengths and eliminate or reduce weaknesses while at this same time developing ways to counter the competitors’ strengths.
For most businesses, if this is done well, two things will happen. The business will be able to increase prices based on the product differentiation and if through this process generate repeat business then the controlling of costs will be easier.
Why will costs be easier to control? Simply put, the least costly way of getting customers through the door is by repeat business. They have already experienced the business and don’t need to be convinced to come back and what’s more they will recommend the business to friends and associates (the second cheapest way of getting customers).
Let’s have a look at this by way of example. If a business has a 30% margin and it increases its price by 10%, then sales can decline by 25 % before gross profit is reduced. Whereas, if it discounts price by 10% on the basis that increased sales will help and the business is running on the same 30% margin it needs to increase sales by 50% to produce the same gross profit.
So, when the business has its price and cost structure right, remember, “Cash is King”. Even with high volume sales at the right price, and costs reduced, a business will fail if it does not have good cash-flow and is unable to pay suppliers and staff when due.
Now is a good time for businesses to have a critical look at how they are operating. Reviews need to focus on all aspects of the business including customer analysis and the finances. Questions to consider are – do you know:
- who your customers are and what their spending behaviour is?
- how often do you review this-weekly/fortnightly/monthly?
- when is the last time your bank and credit statements were reconciled?
- the breakdown percentage of your costs?
- your gross profit margin and overheads? and so on.
If you think this is the role of the bookkeeper, think again. Business owners need to keep an eye on the ball, making sure the business stays financial and trends are regularly identified and monitored before you have any significant detrimental impact or conversely so you can’t be taken advantage of.
Of course your bookkeeper and/or business advisor can assist with gathering this information.
Need help or more information – contact us – we can help!