Have you ever cut your prices in response to your competitors doing so? Or thought that you could cut prices and make up for it with volume?
I’m going to show you why that’s a really, horrifyingly, amazingly dangerous thing to do to yourself and your business.
Are you sitting down?
Okay, now imagine you’ve cut your prices. Let’s ignore the fact that your profits will spiral downwards for a moment (more to follow on that) and ask if you can cope with the increased demand (assuming that it happens).
What normally happens is that either: you’ll get so many orders that you can’t meet deliveries or maintain your quality, so you’ll lose your customers.
Or your competitors also cut their prices, creating a price war in which everyone loses – because nothing changes except that you’re all making less money.
You’re all back at square one, but you’re working harder for smaller profits. And your customers are getting lower quality and inferior service, so you’re probably losing them too.
Anyway, let’s just put a pin in that and look at the numbers for a moment.
Imagine that you’ve dropped your prices by 10% to match your competitors. The numbers I’m about to throw at you are simplified a little, but the principle remains and is sound.
Let’s take a broad margin of 35% as typical. If yours is higher or lower, you can substitute your own figures easily. But the smaller your margin, the more drastic the results of a price cut.
Say you’re selling your doo-dahs at £135 with a margin of 35%. That means it costs you £100 to supply and you make £35 on each sale.
But then you decide to cut your prices by 10% so you’re selling your doo-dahs for £121.50. Now your profit on each doo-dah is just £21.50.
Which means that 10% price-cut has slashed your profits to just 61.43% of their previous level. (£21.50 / 35 x 100 = 61.43%)
That means that you’ve just cut your profits by 38.57%. Does that sound good? Didn’t think so. Because that means you’re working MUCH harder just to make the same money!
That’s all a bit depressing, though, so let’s look at what happens if you raise your prices by 10%.
In fact, doing so will increase your profits by a massive 39% on the same number of sales.
And that means that you can increase your prices by 10% and have your sales fall by a LOT and still make the same amount of money!
In real-life terms, that means you could have Friday off (for example) but make the same amount of money as if you were working a full week. Sounds good to me.
This is how it works.
You’re now selling your £135 doo-dahs for £148.50. This gives you a margin of 48.5%. So that means it’s still costing you £100 to supply your doo-dahs, but you’re making £48.50 on each one.
Your profits have increased to:
£48.50 / 35 x 100 = 139%
Wicked. You’ve just increased your profits by 39% for no extra work.
Need any more incentive to put your prices up a tad?
Worried you’ll lose customers? Well, you may lose some customers. But you’ll lose fewer than you think and they’ll be ones you can well afford to lose. (In my experience, those you lose will be the first to complain about price and the slowest to pay. Good riddance.)
But the best thing is that the perceived quality of your whole business will improve. Your positioning will change for the better.
You’ll be entering the realm of premium pricing.
And the hardest part about it will be making the decision to do so. It’s a brave decision – but it will pay off massively in the medium-to-long term.
Be brave. Raise your prices.
Vicky Fraser is a copywriter, author, and entrepreneur. She really did run away with the circus… but when she’s not swinging from a trapeze, she’s showing other copywriters and small business owners how to work with better clients, make more money, and stop missing bathtimes, first words, and dinners with angry partners. In fact, she wrote the book on it. Get your copy here.