More Money For Shoes author Melissa Brown looks at the effect of pricing.
Discounting may push up your sales in the short term but it’s important to understand the effect a decision like cutting prices can have on your bottom line.
While understanding the effect of a discount is important, it’s just as critical to understand the effect of a price increase.
Now that might seem like an odd statement to make.
Of course you understand the effect of a price increase right?
Well, I don’t believe business owners do.
Sure they might get to know their target market and perhaps even create an avatar for their ideal customer but often they’re reluctant to charge what their customer is prepared to pay.
Perhaps it’s because business owners are concerned about the current economic climate, perhaps it’s concern over slowing retail sales or perhaps it’s because pricing is often linked with the business owner’s selfconfidence and feelings of self-worth.
What I do know is that when business owners understand the numbers behind raising prices, it means decisions can be made on fact instead of emotion.
The table below may look confusing but it demonstrates the sales volume a business can afford to lose if they were to raise their prices, simply to make the same amount of profit as if the prices weren’t raised.
For example, let’s say Terry is a clothing wholesaler.
He has a 50 per cent gross profit margin on his clothing.
So if he sold an item of clothing for $100 then the cost of that item would be $50 and Terry’s gross profit would be $50.
Terry usually makes $1,000 worth of sales per day with a gross profit of $500.
Terry wants to raise his prices by 20 per cent but is concerned about losing customers and the effect on his profit.
Using the table below, we can see that if Terry puts his prices up by 20 per cent he could lose 29 per cent of his sales volume and still make the same profits as he did before the price increase.
What this means is that Terry can increase his prices, work less and potentially reduce overheads by having a lower sales volume but the same amount of profit.
Alternatively if Terry loses less than 29 per cent worth of sales volume, he will be making more money but doing less for it.
Sounds like a great result.
If you suspect your pricing needs to be revised, then use the table above to test and measure the effect of a change in price on your sales volume.
Yes there will be emotion involved in pricing, but by understanding the numbers it can help to reduce any fears over loss of customers by having some certainty over what you can afford to lose.