Do You Know Your Margins?
The quickest way for any business to make 10% more profit each year is to put up its prices by 10%, but if it is as simple as that, then why aren’t we all doing it? The reason is that we have a fear that in doing so, we are going to lose our customers.
However, like most fears, when you analise them they are only “false expectations appearing real.” The reality is that in any market you can and should increase your prices, and if you know how to do it properly, you need never be fearful of losing a single customer.
The first thing to understand is that you must know your numbers. If you do not understand your own profit and loss account, know your gross profit from your net profit and what products make money and which do not, then you are right to be fearful. Without this knowledge, you will not know where to start and may well find you are increasing prices in the wrong area of your business and wake up the next morning with no customers at all. So if you are not tracking these important figures and do not have detailed analysis of what you sell and how much it costs you, then stop reading right now, book a meeting with your accountant and do not read any further until you have got the information at your fingertips.
OK, so now I will assume that you are financially literate. Your next step is to understand that if a company making a 30% gross profit were to increase its prices by 10%, it would have to lose 25% of its customers to be financially worse off. Yes, that is right; if 20% of your customers objected to the price rise of 10p in every €1 and went elsewhere, then you would still be better off putting your prices up. Also if you raise your prices by a higher figure, say by 30%, you could afford to lose 50% of your clients. Think of the time and effort you would save!
If you don’t believe me, work it out for yourself, then read on! If you can’t work it out, then go back to your accountant! Obviously if you have higher or lower margins the figures will be slightly different, but the concept will be the same.
I have been working on this one strategy with clients for 7 years and in all that time, the average loss of customers from a price rise is 1-2%. But this could be a hidden bonus for you in this as well. The clients that do leave as a result of a price increase are usually the ones that have always quibbled about price, don’t pay on time, cause you stress and grief and use up time that should be spent with your top clients. By losing your worst clients, you can spend more time on your best clients who will in turn buy more from you and stay longer. And there is a further bonus in that these bad clients that leave you go to your competitors and make their life hell instead! So you really can’t lose.
OK, you still may not be convinced by my argument and think that there must be a catch. Well, for some of you, no, there is no catch. If you only have a few products or services, you really believe in them, you give good value and have a good relationship with your clients; you can put up your prices tomorrow. I helped one service provider client do this and we doubled the profitability of his business virtually overnight.
For those of you with multiple products and services which are more commodity-based, where your clients have little loyalty and there is high price sensitivity and competition, then a more strategic approach than a general price rise is needed. For you, rather than increasing all prices, you need to work out which products and services you should increase and which you should leave alone. As I said above, you have to know your numbers, but this time down to a product line margin basis. Then you need to look for those products that are going to meet one or more of the following criteria:
High volume, so that a small increase can have a big effect (e.g. 1p on a litre of petrol)
High ticket price – so that a reasonable € increase is a low % increase (e.g. €5,000 on a new Ferrari)
Highly differentiated – where you can show a real point of difference that will justify a higher price (e.g. Apple’s iPhone)
Low access to knowledge – where access to competitors’ price and offering is harder to find or is confusing (e.g. energy tariffs)
Able to reposition – turn your product/service into a basic/better/best, so the basic competes on price and the others on value (e.g. Tesco’s value and finest range)
Add-ons – have a basic range and charge for extras (e.g. BMW & Mercedes).
This list is not exhaustive, but I find with my clients I rarely need to go beyond the basics to make a difference, and what a difference – for every €1 on the price, 100% of it goes straight to your bottom line!
So go on, take ACTION and put up those prices- just warn me first so I can get my order in before you do!