As the economy struggles to recover, and competition gets more and more fierce, we thought it was important to bring to your attention the problems you encounter by reducing your prices in the hope that this will bring you more sales.
One of the most common and most costly traps business owners fall into has to do with the perception that the quickest way to increase cash flow when sales are down is to have a ‘sale’.
On the surface, the concept itself seems to make sense. We need more sales, so we lower our prices.
Lower prices will attract more buyers who will purchase more of our products at the reduced prices. And we’ll make up for the money we’ll lose with the lower prices by the increased number of sales.
But the reality is, rarely is this strategy a success.
Having a sale, reducing prices in order to attract more customers, can often be the kiss of death for businesses unaware of the bigger picture.
In reality, there is rarely a good reason to reduce your prices. No matter what you think, most people do
NOT buy on price and price alone. In fact, research over the last 6 recessions has shown that only between 5% and 20% of people buy on price. Most people think it’s the other way around! So let’s take a look at the effects of reducing your prices...
Let’s assume, for illustration purposes, that your business operates on a 30% margin and you want to reduce the price to increase sales. If you lower the price just 10%, you’ll need to increase the number of sales you make, or the number of customers you sell to, by 50% just to maintain the original profit.
Don’t believe it? Let’s walk through the numbers…
Let’s say that you sell an item for £100, and that your total costs to acquire that product and get it out the door comes to £70. That leaves you with a net profit of £30 on that item.
Now, let’s say that you reduce your price by 10%. You now sell that item for £90.
You didn’t do anything to reduce your product costs or your expenses. All you did is reduce the amount you charged your customers.
If you subtract your £70 costs from the £90 sale price, you net £20.
Now, if you subtract this £20 from your previous profits of £30, you end up with a £10 difference. Divide the £10 by £20, and you get 50%.
So to get back to the same profit level that you were enjoying before you lowered your prices, you’ll have to sell more items or the same number of items to 50% more customers. Now, here’s another problem most businesses fail to take into account. No one knows you’re having a sale unless you tell them about it.
So you need to advertise or send something out to let everyone know you’re having a sale.
And if you expect to attract more customers and sell more goods, you may need to beef up staff, salespeople, delivery, packaging, money processing, accounting, stocking, signage and any number of additional things that you may not initially consider and all of which further increases your costs.
So when you look closely and carefully at having a sale, you may have to sell considerably more than the 50% to even come close to breaking even.
IMPORTANT
REDUCING PRICES IS THEREFORE SOMETHING YOU NEED TO THINK VERY CAREFULLY ABOUT. REMEMBER, VALUE AND PRICE ARE LINKED – SO PROVIDE MORE VALUE AND YOU’LL STILL GET THE SALES!
The Value Of Increasing Prices
In our estimation, we believe that 90% of ALL businesses charge too little for their products and services.
Often people are scared to increase their prices, and business owners rarely test different price points (do you?).
But having carefully targeted your prospects and customers (like we always advise you do), you are in a position to charge premium prices because you are seen by the market as THE go-to company for their specific requirements.
And there is no quicker way of increasing your profits and the success of your business than by increasing your prices. Let’s take a look...
Using the same 30% margin as in our previous example, instead of decreasing prices by 10%, you raise them by 10%.
The result?
You can now maintain the same profit margin with a 25% reduction in sales volume… either in the number of items sold, or in the number of customers sold to.
You could actually lose one out of every four customers and still make the same money.
Now, let’s compare two identical businesses which sell exactly the same products. Business A lowers prices by 10% and Business B increases prices by 10%.
As was pointed out, Business A has to sell 50% more, and Business B can sell 25% less, and they’ll both make the same profits as before.
While the owner of Business A is working his/her tail off just to break even, Business B owner is cruising along without all the stress, worry and other problems, and yet is making the same net profits.
Furthermore, what is often surprising to business owners is that when they do increase their prices, the opposite of what they expect actually occurs. Instead of losing customers, they actually gain more customers.
Why?
Because the higher prices are met with the perception that your products or services are worth more and therefore this perception of ‘added value’ gives the business a welcome influx of sales it would previously never have received.
We have numerous examples of this. For instance, a photographer was charging just £450 per day for his wedding service.
With very little change to the way he carried out the service, he increased his prices to over £3,000 in three months.
A restaurant owner increased her prices by 20% and saw an immediate increase in bookings .
A jewellery store increased prices 15%, resulting in an increase of £25,000 a month in sales.
These are not isolated incidents. If you get your target market right and you deliver a good-quality product or service, increasing your prices and increasing your sales is NOT a pipe dream.
So what if you’re selling a commodity-type product or service, whereby people can easily shop for the best price? Well, it’s no different. What you have to do, though, is create a level of service that is unmatched by any of your competitors.
This includes offering superior delivery times, quicker service or using a powerful guarantee which no other competitor offers and creating ‘premium’ products or services that customers will be happy to pay more for.
So even if you’re reluctant to increase your prices, concentrate on giving more value and you’ll still get many more sales.
As long as you create a gulf of value between you and the competition you’ll be able to increase your prices.
Believe us no matter what you sell, increasing your prices is something you should look at doing now.
Of course, don’t just make a wholesale increase right across the business. Increasing your prices is a tactic that should be approached like all your other tactics. Test small and then roll out when you have sufficient evidence that it works.
