When we talk to clients about the key performance areas of any businesses profitability we generally come down to four factors that need to be measured and monitored closely: stockturn, quantity of sales, margins and average retail. There are many factors that can affect these four areas, but if there is any area of a business that is the quickest and easiest to adjust in order to improve the bottom line it would be price. It would also be the area of business that store owners have the most reservations about changing.
Increasing your prices has a double benefit as it not only helps raise average retail but it immediately lifts your margin or gross profit on the item sold. Given there is little or no extra cost involved in selling an item when the price is increased then each extra dollar of sales will generally turn into an extra dollar of profit on the bottom line. The effect of this can be huge.
If you work on 100% mark up and sell an item which costs you $50 for $100 then your profit is $50. An increase of 10% in your selling price on the same item will result in $60 profit on this item. On a $50 cost price this mark up has increased by 20%.
Take this through to the bottom line after expenses. If after allowing for rent, wages, etc. this business generally makes $10 or 10% profit for every $100 of sales, then they have just added another $10 to their bottom line profit – they have doubled their profitability from a 10% increase in sales.
Now this is simplistic, but it illustrates the point. This business would have to lose a lot of customers from a 10% price increase in order to be worse off from raising their prices by 10%. If they lost 10% of their customers they would still be better off from the increase.
The secret is knowing what price increase will reach the level of resistance – the point where a further increase becomes detrimental to the business and more customers are lost than the extra revenue can cover, and this can be the hard part.
I would argue however that few businesses ever reach this point – because they encounter their own mental preconceptions long before they ever reach their customers’ barriers.
Many store owners have an issue around increasing their prices – far more than their customers ever do and this comes back to our own deep seated views on money. If we increase our prices we are fearful of being called “greedy” or accused of “ripping people off,” that we aren’t doing “an honest day’s work for an honest day’s pay.” These preconceptions are not based on reality. When I ask most store owners why anyone should shop with them I get answers like “we offer the best service” yet despite telling me this these same store owners won’t charge enough for their services because they “don’t want to rip anybody off.”
Where is the value in that?
Many store owners use a “cost plus” mentality on the prices they set, yet take no account of the extra value that is provided between receiving the goods instore and on-selling them to the customer. By not adding in the extra value they are making the same offer to the customer as the competitor who sells them the same item at the same price. These stores don’t believe their own value proposition and are not prepared to back it up.
Building your wealth and income is not a dirty word. The more value you provide people the wealthier you will become – and you will deserve it. If you don’t want to increase your prices it may be because deep down you don’t feel you have any extra value to offer the customer. If that’s the case then look at how you can bring more value to the marketplace so you can charge more for it.
If you spend more time working on your value proposition and less worrying about your competitors’ pricing you will move your business forward far quicker.