The right price can boost profit faster than increasing volume ever will. The wrong price can shrink a profit just as quickly. You may understandably be wary of increasing prices for fear of alienating or losing customers but the result of not managing your price performance could be far more damaging.
Many business owners think they only need to increase sales for profit maximisation. Perhaps they should think again because getting the price right is the most fundamental and important management function – and will lead to increased profits much more quickly and effectively than just an increase in sales.
How can Price Maximisation be Achieved?
Firstly, figure out your gross profit margin
Make sure you know your up-to-date, overall gross profit margin. It’s no good using estimated figures. Prepare interim accounts up to the last month and get some benchmarking figures from your accountant. How does your company compare to the industry average?
Analyse your profit margins
Your overall gross profit margin could be deceiving. Find out the gross profit margin on each of your products and services, and, in addition, analyse your gross margins over different business divisions, product categories, suppliers or customer categories. By doing this you can identify both low margin/loss-making items and profitable products. Stop selling low margin lines and focus on the ones that produce the most profit.
Increase your prices
This can be a difficult decision but sometimes business owners are more concerned about this issue than their customers. Remember that your overheads are going up all the time. Of course you might lose the odd customer in the process but they won't be your best customers because most customers buy on value. They make a decision to buy based on the perceived worth of your product compared to what your competitors are offering – not just the price.
The longer you put off raising prices, the more you will eventually have to raise them to recover your margins - and then the size of the price increase might cause you to lose more customers than otherwise. Incremental increases have far less impact.
If you sell a range of product lines targeting different customer groups or market segments with different levels of competition, some may be able to stand price rises better than others.
Note to self: if your margin is 50%, a 10% increase in prices means you can lose 17% of your customers yet be no worse off! Something to ponder on.
Review all your prices
Do you charge all customers the same price? If so, why? You’ll invariably find that some customers are less price sensitive than others, especially if they’re not paying for the bills themselves, e.g. Central and Local Government/NHS contracts. Have you increased your prices to match supplier price rises and kept up with the competition?
Discounting can sound the death knell of many businesses because it badly destroys margins. At a margin of 50%, if you discount your prices by 10%, you need a 25% increase in sales just to stand still. That statistic might just keep you awake at night!
Don’t compete on price
Learn to differentiate yourself in other ways, whether by giving superior value, going the extra mile or reducing all the other (non-monetary) costs of doing business with you – effort, time etc. Reliability and excellent customer service count for a lot.
Few decisions have as large an impact on the success of your business as setting the right product prices. Your prices influence how many customers actually purchase your products, the types of customers you attract - and sales revenue. This all has a direct effect on your profit margins.
Every pricing decision you make should offer a win-win outcome where your customers get good value for their money and your business makes a healthy profit. So, start a review of your pricing strategy without delay.
The strategy and Tactics of Pricing, Tom Nagle and John Hogan, 2016.
Pricing Strategy: tactics and strategies for pricing with confidence, Warren D. Hamilton, 2014.
Pricing for Profit: how to develop a powerful pricing strategy for your business, Peter Hill, 2013.
Pricing Strategy: how to price a product, Bill McFarlane 2012.
Value-based pricing: drive sales and boost your bottom line by creating, communicating and capturing customer value, Harry Macdivitt and Mike Wilkinson, 2011.