What are our options?

We are all looking to increase our profitability, our bottom line. But what’s the best way of going about this. First, we need to understand some basic numbers and terminology and let’s use a fictitious business to do just that.

So we start with a status quo business that looks like this

Sales excluding VAT1000
Cost Of Sales60060.0%
Gross Profit40040.0%
Overheads30030.0%
Net Profit10010.0%

To clarify what I mean by cost of sales, in essence, what it costs you to provide the product or service – if a product, it’s the cost to you.  If you are creating a service, it’s the cost of creating that service to include salaries.  We need these numbers to understand our gross margins – don’t get too hung up on the definitions though, as it is the principles we need to understand.

We can increase our profitability by

  1. Growing Sales
  2. Reducing The Cost Of Sales
  3. Reducing Overheads
  4. Reducing All Costs
  5. Increasing Prices

And when we grow sales by 1%…

Sales excluding VAT1010
Cost Of Sales60660.0%
Gross Profit40440.0%
Overheads30029.7%
Net Profit10410.3%

Our net profitability grows by 4%.

1% more sales results in 4% more net profit…a great return.

Or we reduce the cost of sales by 1% 

Sales excluding VAT1000
Cost Of Sales59459.4%
Gross Profit40640.6%
Overheads30030.0%
Net Profit10610.6%

Our net profitability grows by 6%.

A good return but how feasible is it?  Well worth looking at if you haven’t done so for a while.

Or we reduce the overheads by 1%

Sales excluding VAT1000
Cost Of Sales60060.0%
Gross Profit40040.0%
Overheads29729.7%
Net Profit10310.3%

The net profit grows by 3%.

Is this possible?  On some items maybe, but wages and rent and rates?  A useful exercise but it has it’s limitations, plus it doesn’t give such a great return does it?

And when we reduce all expenditure by 1%

(which is virtually impossible but for argument’s sake let’s look at the impact)

Sales excluding VAT1000
Cost Of Sales59459.4%
Gross Profit40640.6%
Overheads29729.7%
Net Profit10910.9%

The net profit grows by 9%.

Great result, but reduce all expenditure??? Highly unlikely!

But what if we put our prices up by 1%

Sales excluding VAT1010
Cost Of Sales60059.4%
Gross Profit41040.6%
Overheads30029.7%
Net Profit11010.9%

Just a 1% increase results in our net profitability growing by 10% – the biggest result of all.

Because all of the increase is profit!

Which Is Most Effective

StrategyRelative EaseNet Profit GrowthScore (a x b)
Status Quo
Grow Sales6424
Reduce COS166
Reduce O/Head339
Reduce All Costs090
Increase Prices51050

Notice how we have a very clear winner.

So you should be on the lookout for price increases all the time.

However you need some caution here – its a tad trite to simply increase your prices and expect your customers and prospects to carry on buying as before.

What you must do is cover them in value

Explain exactly why they should buy from you using all of the Business Boosters which are at the core of the Business Growth Club.  That means benefits, not features; tons of social proof showing what people who have bought from you already think; have a guarantee to reverse the risk; give reasons why you can make your claims with confidence; use offers to entice them to engage; great calls to action to make sure they take action today as tomorrow never comes!

Treat them as the most valuable asset of your business – as they undoubtedly are! In fact, in most businesses, they are often the only asset with any real value.

Most small businesses don’t put their prices up because they are poor at explaining their proposition, and pay far too little attention to this crucial area.

So what do most small businesses do?

They lower their prices in a race to the bottom.  Because they don’t have (or give) other reasons for customers to choose them.

Let’s look at what happens to your bottom line if you lower your prices and discount…

Therefore if you have a 30% gross margin and discount by only 10%, you have to sell 50% more to stand still!

However let’s look at what happens when you increase prices…

Let’s put the two head to head…

A increases prices by 10%, B reduces them by 10%.

A can sell 25% less and avoid the hassle.

B must sell 50% more and has to work his butt off.

So if you can, always look to increase prices!

Hope this is useful and if you want to talk, just give me a call or drop me a line Contact Neil

You can find similar information here: BGC Free Knowledge

We discuss these type of topics every month in our Free get-togethers in Poringland and Hellesdon – no need to book just turn up and work on your business for a couple of hours, and meet like minded business owners too – details here Get Together Meetings