Price decrease or increase?
To answer the question, let’s look at an example of a business is making sales of £1,000,000 with net profit of £200,000.
Let’s say we cut our prices by 10%.
If we cut prices by 10%, and nothing else changes, sales will go down by £100,000. This will come straight to the bottom line and reduce profit in half to £100,000.
But, you may argue that the business will get more customers because it is cheaper.
The question is how many more you need to get to make more money of the cut of price you needed before?
Well let’s do the numbers based on the business having 2,000 customers. The profit per customer would be is £50, so to make £200,000 they will need 4,000 customers which us 100% more!
Would cutting your prices by 10% double your customer base?
Now lets’ do the reverse.
Let’s say that instead of cutting our prices we look at an increase in our prices by 10%. You’d probably say that you will lose too many customers to make it pay.
Let’s see how many customers you can actually afford to lose?
Well, with a 10% price increase the profit per customer is £150 so we only need 1,333 to make £200,000. So, as long we don’t lose more than a third of our customers where making more money than before.
Let’s say we lose 20% of our customers leave, this would leave us with have 1,600 people paying £550 with a cost of £400 giving us a total profit £240,000. We are £40,000 better off.
Not only do we make more money but because we have fewer customers we sell less which means we need less money to fund our business.
We need to borrow less from the bank because we have got rid of some high hassle, low margin customers. Life is easier because we got less work to do, less stress and less risk.
Now, these numbers won’t be exactly accurate for your business. But, you can do this type of financial modeling or sit down with you and work the numbers for your business.
Now, in the next few posts I will share some ideas on how to increase your prices and cut the losses to a minimum and even increase customer numbers!