Dont Let Your Prices Send You Broke-3u8895

Sales Small and medium business owners generally have a natural aversion to increasing their prices. The typical belief is that any increase in prices will result in existing customers leaving in droves, canceling orders, making abusive phone calls, sending nasty letters and emails and telling the entire world how bad your business is. In reality, this is rarely the case. Of course, there are certain industries that are extremely price sensitive and business owners in these industries need to take great care in adjusting their pricing. However, for most businesses, the failure to introduce periodic systematic price increases can ultimately lead to massive problems over time. A typical small business will be used for example purposes to analyse pricing. Kev’s Plants is a suburban nursery that has been built up by Kev over the last 10 years. Kev’s Plants currently has turnover of $2m and a net profit margin of 10% or $200,000 ($2m sales @ 10% net profit margin). Kev believes that his profit will be maintained around that level with little or no growth in sales volumes. He hopes to sell the business in 10 years on a good earnings multiple to fund a comfortable retirement. Every business faces increased annual wage pressure and increased direct costs from their suppliers, not to mention general inflation that increases most overhead expenses within a business. If business owners don’t regularly pass on price increases to absorb increasing costs, you will simply be out of business over time. Scenario 1 assumes Kev does not increase his prices for the next 5 years while inflation rises at the modest rate of 3%. At the end of 2008, Kev’s profit drops from $200,000 to $146,000 due to the inflationary impact on business expenses. By 2009, profit drops to $90,380 and in 2010 it drops to $33,091. After only 4 years, in 2011 the business is now generating a loss of $25,916. Kev’s Plants has gone broke with no reduction in sales! Scenario 2 assumes Kev does not increase his prices for the next 5 years while inflation rises at 6% which is still significantly less that that experienced in the recession of the late 1980’s & early 1990’s. At the end of the 2008, Kev’s profit drops from $200,000 to $92,000. In 2009, and after only 2 years, the business will be suffering a loss of $22,480. Wow. Scenario 3 assumes Kev implements annual price increases of 3% against an annual inflation rate of 3%. By doing this Kev has effectively neutralised the impact of inflation on his profitability with sales increasing proportionately with expenses and his 10% profit margin being maintained. Scenario 4 assumes Kev is able to increase his prices annually by 4% against an annual inflation rate of 3%. At the end of 2008, Kev’s net profit increases from 10% to 10.9%. In 2009, net profit margin increases to 11.7%. In 2010, net profit margin increases to 12.6% and increases again to 13.4% in 2011. After 5 years, in 2012 Kev’s net profit margin is now 14.2% against his current profit margin of 10%. This shows the incredible effect of compounding remembering that we assumed no increase in sales volumes. Scenario 5 assumes Kev is able grow sales volumes by 5% annually and increase his prices annually by 4% against an annual inflation rate of 3%. At the end of 2008, Kev’s net profit increases from 10% to 11.6%. In 2009, net profit margin increases to 13.2%. In 2010, his net profit increases to 14.6% and increases again to 15.9% in 2011. After 5 years in 2012, Kev’s profit margin is now 16.9% against his current profit margin of 10%. Kev’s plants has achieved a 69% (16.9% versus 10%) increase in net profit over 5 years with just a 5% annual growth in sales volume and annual price increases 1% above inflation. But it gets worse Are you a Price Taker or Price Maker? Price Takers operate in industries which are price sensitive and where customers are largely driven by price. These businesses often have less ability to increase prices and seek to grow their businesses through higher sales volumes, increased productivity and lower costs. Examples include the transport industry and commodity industries. Price Makers have more flexibility in increasing their prices. In product based industries, this may be due to exclusive product, territory or market share. In service industries, this may be due to expert skills and superior service levels. What if your costs increase faster than your ability to increase prices? Looking at your direct costs, labour costs are increasing higher than inflation due to full employment. Many businesses have between one and five major suppliers who often control the supply market and increase their prices which you can’t pass on. Looking at general overhead costs, many of these service providers are corporate businesses providing IT, communication and utility services. They are merciless and predictable in their ability to regularly increase prices often above the inflation rate. So what can you do to protect your profits falling? Assess your industry and position. Analyse whether you are a price taker or price maker. Assess where your opportunities are in raising prices to protect against inflation and higher costs. If you are a Price Taker. You need to review how your competitors are dealing with price. If price increase opportunities are marginal, focus on increasing your sales volumes, raising productivity and lowering costs. If you are a Price Maker. Consider establishing a policy of annual price increases linked to CPI increases. This must be handled appropriately in communicating with customers and creating an expectation that there will be annual price increases for valid commercial reasons. Every year missed is a year lost. When you don’t increase prices for several years you never get the opportunity to fully catch up through increasing prices on a one-off basis. Executing price increases well is an incremental discipline that uses compounding to advantage. Darren Bourke, Business Influence, 2008. You are welcome to reprint this article online as long as it remains complete (including the about the author information at the end). About the Author: Darren Bourke is a Consultant, Business Coach & Mentor who helps small & medium businesses struggling to maximise profitability, productivity, people and performance. His Free Report titled What Successful Owners of Growth Businesses Do That You Don"’t, newsletter and updates are full of strategies and tips to make your business boom. Sign up now at .ww.businessinfluence…au Article Published On: 相关的主题文章: