They say there are many ways to skin a cat. But is there truly a single best way to grow a business? Is there something really?
In my 19 years of consulting with more than 150 SMEs, I can say unequivocally that there is such a way and that’s – PRICE.
Price is the single best way to grow your business. However, whenever I mentioned the price issue to my clients, they would tremble. They would think of the negative side of it than the positive side of it.
In this article I aim to help dismiss such negative thoughts about pricing in my readers mind. I hope to help them rethink their current pricing and start growing their business.
Before we start, you need to know your business fundamentals as listed below:
- Your current average selling price for your products and services;
- Your average margin requirement to stay afloat;
- Your Break-even sales needed on a monthly or quarterly basis; and
- The net profit you want to see your business making on a quarterly or annual basis.
Once you have the abovementioned information at hand then your fun begins. Assuming your business needed a 30% margin to stay afloat every month, then try the following.
- Try increasing the average selling price of your products and services by just only 5% and see what happens to your gross and net profits. What did you noticed?
If you have tried the above, then you would notice the followings;
- At 30% margin requirement and with a 5% price increase, would return you a 17% increase in your gross profit;
- Your Breakeven sales would decrease dramatically and depending on the business you’re in, our experience have shown that the above scenario usually brings about a 20% reduction in your monthly or quarterly Break-even sales;
- Your net profit (assuming there is no changes in your cost base and interest payments) shall increase by the same percentage of 17%; and
- Your Cash Flow shall become much easier, and ROI increased.
Isn’t these are the results what you have always wanted? However, most business owners are not in favor of any price increase fearing the loss of customers, sales revenue, and profits. While their concerns are valid but I think they are overrated. At 30% margin requirement and a price increase of only 5% would result in a 14% reduction in your sales volume and yet still maintain your profits levels. With this 14% reduction in your sales volume would help you to free up your investment in your inventories, warehouse space, administration works, and transportation costs etc. These are permanent costs reduction and they are good for your balance sheet.
Yes, this 14% may come from your existing customers. With your price increase, they may choose to do business with your competitors. And this is exactly what I want for my consulting clients’ business. This customers are just price shoppers and they usually do not add value to your balance sheet. In most cases they will cost you more money to have them than NOT to have them with you.
We want customers who value our products and services and to keep them in the business for the long haul but not price shoppers. By increasing your price, you increase your entry barrier and in the process you eliminate price shoppers from your customer list and suddenly you realised you have a group of valuable, and happy customers that you can serve happily and profitably.
It wouldn’t surprise me if you still feel hesitant after reading this article. This is normal. But I would encourage that you try the idea on a few products that you sell. See the results yourself. I guarantee you will love the results and then implement it throughout your product and service lines and make your business a Cash Cow from then on.