Taking Your Business to the Gym – Pricing for Profit

I was giving a seminar recently and it included a section on pricing. What really shocked me was how few people understood how to price properly and just how many businesses were almost paralysed with fear about raising their prices. Now i understand that we're the worst recession for at least 20 years, but at least 50% of my audience had not increased prices for more than 2 years. Their argument in a nutshell was that they couldn't increase their prices because they'd lose too many customers. I asked them if any of their suppliers had increased prices to them in that time, not surprisingly many of them complained just how many times suppliers had raised prices over the period. When I asked if they had changed suppliers as a result of these price increases they said, without exception, no. In fact they seemed rather surprised that I should even suggest it. My question was then if you've accepted price increases from your suppliers why won't your customers accept price increases from you. At this point there was a lot of murmuring and a few brave souls suggested because they were small companies there would be less loyalty and their customers would move. I simply can't except that as a valid argument and experience shows that most customers are immune to price increases.

I decided then to demonstrate how raising your price delivers more profit even if some of your customers leave.

No of units	10	9	11
Price per unit	10	11	9
Sales Total	100	99	99
Fixed cost	30	30	30
Variable Cost@£6 per unit	60	54	66
Profit	10	15	3

The table above explains what I mean. Let's assume you sell ten units of a product at £10 each giving you a sales income of £100. Of that £30 was fixed cost and the variable cost was £6 per item sold equalling £60 which when subtracted from your sales total gives a profit of £10. In our second case we raise our prices by 10% which leads to a fall in demand of 10%> So we now sell 9 units at £11 pounds each total sales are £99, fixed costs remain at £30 and variable costs are only £54 leaving a profit of £15. In our third scenario we reduce prices by 10% which in turn leads to a 10% increase in sales. We still only have £99 in sales however variable costs have gone up to £66 leaving a paltry £3 profit.

So what conclusions can we draw from this situation, well firstly to price for profit you MUST increase your prices, if you hold you prices whilst your suppliers increase their you are in effect offering a hidden discount and putting pressure on your margins as your variable costs are increasing. In the example above a 10% discount means you have to increase sales by 33% to maintain your profit. By contrast if you increase sales by 10% sales have to fall by more than 20% for profits to suffer. The most important thing however is to understand is that in reality most people are price insensitive, for example on Accountant client I worked with increased their prices on simple tax returns by 100% and lost only 5 out of 80 clients delivering over £15000 in extra profit.

Exigent Consulting specialises in providing Business Turnaround, Sales, Marketing and Mentoring to the Small and Medium Business. We help Business Owners improve the profit performance of their business.