The Importance of Margins and Price Increases

The Importance of Margins and Price Increases
Here is a great article I wanted to share with you about the Importance of Margins and Price Increases written by a fellow ActionCOACH Jay McDowell.

Enjoy the read,

 

Ormond

The Importance of Margins and Price Increases

Every business owner needs to understand the concept of margins and increasing prices is a great way to achieve higher margins.

Understand Your Margins:

Margins are what you make after ALL costs have been deducted. Therefore, any increase you make to margins will be clean profit – and that’s got to be a good thing. In fact, profit is my favorite six-letter word. Yet despite the black and white advantages of increased margins, far too little time is spent analyzing ways of improving them.

 

The really exciting part is that the tiniest of improvements can equate to massive differences in your bank balance. By increasing margins by just five percent, some businesses will experience profit increases equivalent to a 50% rise in sales, sometimes even more.

 

Give me a “P”, give me an “R”, give me an “O”, give me an “F”, give me an “I”, give me a “T”: What does it spell? Margins!

One last thing, this isn’t just about cost cutting, it’s far more exciting. One of the best ways to boost margins is by raising your prices.

 

Increase Your Prices:

Most business owners have more of a problem with a price increase than do their customers. This has to be the fastest and best way to jump your profitability. 95% of your customers won’t even notice the rise and the 5% that do complain are the 5% that already complain. If you’re too scared to increase your prices across the board, just increase the prices on the 80% of your products or services that are the slow sellers and leave the 20% of your fastest sellers until last.

Here are some useful hints and tips on increasing your prices:

  • • Introduce increases right now.
  • • Don’t draw attention to the rises, but if people inquire explain the reason and then focus on the extra benefits.
  • • Make it at least a 10% price increase.

 

Do you think that increasing prices just won’t work in “my industry”? I have heard this far too many times. Maybe you allow your sales staff to “discount” your standard pricing to acquire new business?

Discounting can be a bottomless pit, and rarely does a client that “requires” a discount become an “A Client”.

Don’t be fooled by this. Not one bit.

The fact of the matter is that most businesses on average return about 10% on sales before tax. This means that after deducting the cost of the goods or services sold and all expenses incurred in running the business, there is 10% of the original sale price left as your profit. So if you discount, say by 10%, then the 10% you are giving away is the same 10% you would have made in profit. So typically, a 10% discount will leave you with no profit.

There are some good and legitimate reasons to discount, such as obsolete or seasonal stock or specific cash flow requirements. There should be specific cut-off points for these strategies. The big chains look at things slightly differently. Often they will work out how much of a particular product they will sell at full price and how much they will sell at a discounted price for the lifetime for that product. So factored into the profit for a particular product is the fact that there will be some discounting. Most small retailers will discount because their competitors are doing so and don’t really consider what it might be costing them.

One of the main reasons small businesses discount is to acquire customers. It invariably is far more profitable to work out some clever marketing strategies than to discount for this reason.

Experience shows that most customers attracted to a business through discounting, rarely if ever come back again.

As any ActionCOACH client will attest, the payoff in marketing is the lifetime value of that customer not a single purchase. Discounting in business should be dealt with very carefully. Because it is so prevalent, small business owners get trapped into thinking that it is a legitimate and profitable strategy.

Clearly it is tricky area and should be thoroughly considered before use.

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