Pricing…Why it matters more than sales!
Time 07:14 AM
Monday, 25th January 2016
Location: Office Desk
Back in the day, I trained as an accountant.
Yes the boring dull as dishwater profession.
Since qualifying I haven’t practiced, though some of the things I learnt have came in handy ever since.
One of those is understanding margins and pricing, which I wanna speak about in this blog post. Heavy topic for a Monday…but it will be an eye opener for sure!
First though, a straight forward question.
Would you rather increase sales or prices?
Most business owners I meet inadvertently respond with SALES.
Most are scared to touch prices. Afraid of scaring off precious customers.
I get it.
Yet, hopefully today I can show you how pricing and in particular raising your prices
will have a much greater impact than just focusing purely on where your sales is at.
First though we need to discuss markups and margins.
What would you consider a healthy markup on a product/service?
(ie how much would you add onto the cost of your product or service to get your selling price)
Obviously, it depends highly on the business…
But a typical markup in your average independent retailer or wholesaler would be 100%. Meaning if you could buy some widget at €50, you would expect to sell it at €100.
Sounds like a healthy place to start right.
But let’s look at it from a margin point of view.
A 100% markup converts into a 50% margin.
Take our example prices…€50 as a percentage of €100 is 50%. Not rocket science.
But as most of you know…the taxman needs his slice which for arguments sake and easy math is 20%.
That leaves you with a net margin of 30%…to cover your general overhead, cost of fulfilling the sale and profit.
Now back to our pricing.
Look, everyone wants a deal. It’s part of the laws of trade. It’s so ingrained that for many of us, throwing out a little discount is a given.
Price comes to €102.50. Ah sure you’ll do it for the hundred.
Of course you do. No big deal right.
But here’s the real impact of shaving that 2.5% discount off repeatedly.
Do it often enough, and you need to pull in an extra 10% customers just to hold your margin and make the same money.
But look I hear you, it doesn’t happen all the time. So no biggy.
Now let’s imagine, sales are slowing and you decide to run a promotion.
10% off everything during sale time. Just a measly 10%. Bound to get a bump in customers and sales to cover it.
What’s the impact of that?
Well cut your prices by 10%…you need a 50% increase in sales to put the same money in your bank.
What if your standard margin isn’t 30%? What if it’s just 20%? Meaning you’re buying at 50 and selling at 80.
Then that 10% discount would require you to double the amount of sales to maintain profit levels.
So I hope this little example shows the dangers of discounts.
If you can, avoid them like the plague.
And that’s only one side of the story.
What about the impact of raising your prices?
So instead of selling for €100, could you sell it for €105. Doesn’t seem like an earth shattering amount.
However, raising your price by just 5% means you could afford a 15% drop off in sales before seeing any negative impact on your overall profit.
Put an extra 10% onto your prices and you could afford a 25% reduction in overall sales.
Hopefully your spotting a trend here.
Pricing has a bigger impact on your profits than sales.
Question, can you increase your prices?
The answer always is YES!
You just need to find a way to increase the value of your offer.
And that’s what I’ll talk about in tomorrow’s post.
Over and out,
P.S. Each month I allocate personal time to provide subscribers with a F.ree 30 Minute Consultation during which all my knowledge and experience of web design and digital marketing is focused on your business. You get to walk away with actionable steps which you can put to use immediately for some quick easy wins. To book a slot go to this page!