The last couple of days I’ve had my head down preparing for my next Profit Accelerator meeting next Wednesday.
It’s going to be a cracker. My small group of four IT support business owners will be looking at improving profit margins; increasing the number of transactions and upping the average sale value. All essential ingredients to improve net profitability.
One of things I’ll be challenging my group to do immediately, will be to put their prices up.
And I’ll be presenting a very compelling reason why. So compelling, that I hope they will be on the phone to their staff at lunchtime to increase the prices.
Here’s the compelling reason…
A 1% price increase typically delivers an 11% impact on gross profit
Here’s how the figures stack up.
Let’s assume you have a 50% gross profit margin.
If you put your prices up by 10%, you could lose 17% of your turnover, and still make the same gross profit.
Put your prices up by 20%, and you’d make the same gross profit even if you lost 29% of your turnover.
Exciting, isn’t it? Because you’re unlikely to lose 29% of turnover just by increasing your prices by 20%.
The trick is to focus on what are known as back end prices – prices that business decision makers typically don’t compare when looking to hire an IT support company. Or put up prices for new clients only, so you don’t disrupt happy existing clients.
To make sure you understand how important this it, let’s look at the impact on gross profit if you LOWER your prices.
On a 50% gross profit margin, if you dropped your prices by 10%, you’d have to increase turnover by 25% to make the same gross profit.
Drop prices by 20%, and you’ve got to grow turnover by 67%. Just to stand still. Crazy.
It’s why you should never ever put prices down. Put them up. Focus on increasing and improving net profitability.
As a happy side note, the best clients are to be found at the top end. They understand the relationship between price paid and quality received.
So come on. What are you waiting for. Put £10 on right now. Your P&L will thank you for it.