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Cashflow tip – Pricing for Profit – Improving financial health
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Published on Monday, 12 December 2016 21:41
In a previous post we looked at the hidden effects that discounting can cause to the financial health of a business – which most small business owners are not aware of, and we also looked at what to do instead – add value!
An alternative step is to look at pricing for profit, of your service or product – have you considered taking an upper or premium pricing strategy? Instead of JUST looking at cutting costs, significant profit upside remains untapped in the area of pricing, and it is much more attractive than focusing on cost-cutting. It is a quick win that goes straight through to the bottom line.
This table shows the amount by which sales would have to reduce following a price increase before your gross profit is reduced below its present level. For example, with a 25% GP margin a 6% increase in price you could sustain an 19% reduction in sales volume! If you are running with a margin of 35% and you raise prices by 10%; then you could lose 22% of your business volume and still be no worse off! And note - if you DON’T lose 22% - you are further in front as a bonus!
So analyse the value of your product and services, and ask if you are positioning your business offerings in the marketplace at their true value to the customer? If you decide that you are worth more, the table arms you with the courage and conviction as well as a guide to monitor the result to price your services and products at their real value!
Statistics show that few price reviews are proactively investigated, let alone implemented. Remember ultimately, decisions on pricing must be measured against other critical factors, applicable to your industry and your situation. Pricing can be an exercise in both leadership and innovation. – But always remember to record and measure – act on facts not just “gut feel”!
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