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" Why would you consider discounting (reducing) your prices?" Discounting can be devastating to your business, but increasing your prices, even by a little, can do wonders for it. | |
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September 2011 Business Improvement Tip This is the eleventh in a new series of monthly business improvement tips - the next will be published in October 2011 - click <here> to view previous tips. Around sixty five previous improvement tips plus other appropriate or useful information are being added to an e-book which will soon be available to download - we will let you know when it becomes available. Why would you consider discounting (reducing) your prices? Many businesses discount (reduce or lower) their prices either to sell more of their goods and services or to be more flexible when dealing with their customers or clients. The problem is that for many businesses discounting can have a devastating impact on profits, even with modest reductions. The primary reason for running any business is to create profit, so the idea of giving away some of that profit in order to sell more products and services may seem a good idea. However, when you analyse the effects of discounting it becomes a totally crazy idea. Suppose you have a 30% profit margin and implement a 10% price reduction - in order just to stand still in terms of profit you will need to increase your sales by a massive 50% - you will need to sell at least 50% more goods or services just to make up for the 10% price reduction. What is really crazy is that you probably lowered your prices in order to sell a few more more products and services. Now you will need to sell considerably more with the added risk that you might not sell enough and end up making even less money than you would have done if you had not provided the discount in the first place. What is worse is that in order to just maintain the same profit you and your team will need to work at least 50% more, you may need to take on extra help which would increase your costs which means you would make even less profit and will need to sell much more. You may also need to significantly increase stock levels, machinery and equipment in order to handle 50% more output ... all because you gave a 10% discount. The implications of discounting are truly mind boggling. You might ask "What about those furniture retailers and other businesses which trade successfully by offering huge discounts?" The fact is they don't actually discount their prices, they only say they do. Look around such retailers to find statements such as "Sold at the higher price for seven days in August in our Outer Hebrides store". If you are tempted to drop your prices, then take a look at the following table before you make any decisions. The effects may surprise and shock you. As an example 30% margin and 10% discount requires 50% more sales to provide the same profit as you would have had without the discount. Effects of discounting (reducing) your prices
How about putting your prices up? Crazy you might think - especially in today's business climate - you might feel justified to say "I'll lose customers, I'll go out of business, my competitors will have a field day, I need to go to the toilet, ." But consider this . Suppose your profit margin is 30% and you raise your prices by 10% - you could actually lose 25% of your business before your profits would suffer. So you could do 25% less business before it affected your profit - in other words 25% of your clients could leave, or your turnover could drop by 25% and you would still be better off. You would be doing less work and making more money - as a result your costs will probably reduce and your profits would increase further, you would have more time to improve your business, and more time to work "on" rather than "in" your business. What about losing customers? - let's face it - if you are providing excellent value and great customer service there's no way that 25% of your customers will leave just because you raised your prices by 10%. So you are pretty much guaranteed to be ahead. The following table shows the effect of increasing prices. As an example 30% margin and 10% price increase means you could lose 25% of your customers before your profit reduced. Effects of increasing your prices
So, why are so many businesses so reluctant to raise prices? The answer is FEAR. They are afraid that if they raise their prices their clients will go elsewhere - but this fear is highly overrated and generally unfounded. Price is only one factor in people's buying decisions and it ranks far lower than we tend to think. Most people will not even notice a moderate increase in price and those that do are relatively few, and most of those that leave will probably come back later. In analysis, you can actually afford to lose some business when you raise your prices and still be ahead of the game. When I first work with new clients I find that many undercharge. When I encourage them to increase their prices most discover that they keep the majority of their clients and then continue to win more new clients. This is because I always ensure that they monitor their competition and consistently provide great customer service, excellent value and always go that extra mile to keep their customers happy. In many instances the fact that they raised their prices actually brought in more customers. One restaurant owner increased his prices by over 20% and as a result took his restaurant to a whole new level of customers. Within four months his turnover had trebled at a time when many of his competitors were closing down. But - yes, there is a big but - if you are competing solely on price then increasing your prices could be totally out of the question. For a great many reasons any business that is competing solely on price will fail sooner or later, usually sooner, as competing solely on price is an unsustainable strategy. But two - if you sell solely via the internet it is extremely difficult to convince your prospects about your great customer service and other attributes as it is so easy for your prospects to trawl the net simply looking for the lowest possible prices, so you will need to do and provide something special to grab their attention and encourage them to buy from you, Rather than competing on price and discounting you should be clearly differentiating your business from the competition by clearly understanding what your customers want or need and using powerful Unique Selling Propositions (USPs) and interesting pre and post delivery guarantees. If these are in place I can assure you that your customers and clients will not just be looking to buy simply on price. Your customers and clients will come to you because of your unique products or your terrific customer service, the overall buying experience you provide, or whatever it is that you do best - not just because of the price. Summary Profit, or "the Bottom Line", is ultimately the best financial measure of your business's success. It is the thing that we are all seeking and the thing that we are always trying to increase. After all, everything else that we do in our business, whether it is marketing, sales, production or team building, are all intended to increase profits in some way. Of course, there are other great reasons to build excellence into your business, but profit is the final measure that counts. So, how do we get those profits up? Well, there are a myriad of things that we can do. In every area of our business lies some opportunity to improve profits. But the easiest and fastest way to increase profits is by raising prices. By increasing prices by a modest 5-10%, we can impact our profit margin by significantly more than that percentage. I tell most of my coaching clients to raise their prices very early on in our time together. Almost all of them do so and not one of them has ever come back to say that they suffered any long term negative effects. In fact, some have said that this piece of advice alone was worth the whole investment in the coaching programme. The tables show that even small increases in prices will generate significant increases in profits and that even small discounts will require significant increases in sales volumes to make up for the loss of income. Discounting should be avoided wherever and whenever possible. Finally - always be aware that raising prices alone is not the key to long term success - any price increase must always be accompanied by significant improvements in customer satisfaction processes - otherwise you will not provide your customers with what they want or need and they will simply "vote with their feet" and go elsewhere - remember that if you do not keep your customers happy there is always someone else out there who just might. |
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Remember ... your business is neither a hobby nor a charity ... you run your business primarily to make money (create wealth) for yourself and those you care about. I can help ... no matter what product or service you may provide, what type of business you may have, what size of business you may have, how successful your business may be, how long you may have been established, or how slowly or rapidly you may want to, or need to, improve ... I can help you build a better business, a better lifestyle, a better life and a better future. Call me now ... we can arrange either a free "no strings" Coaching Session, Success Mentoring Session, or Business Health Check - where we will talk about you, your business, your challenges, your frustrations and your problems ... we will talk about your hopes, dreams, desires, aspirations and long term goals ... we will explore the opportunities for improvement which exist in you and your business ... Call me now ... you have little to lose ... and a great deal to gain. Jim Yates - 01778 345990 |
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