Downswings in the economy, interest rate hikes, petrol price increases and inflationary increases are a fact of life, and unless you live in Zimbabwe, you don't really have a case to blame business failures on these external factors.
It is a business owner's duty to ensure that their business does not fall victim to external economic pressures and install the discipline of regularly reviewing prices. This practice should be done a minimum of twice a year, before external cost pressures erode the bottom line.
Below is an example of selling a $500 item / service, without reviewing the price on a regular basis. This calculation is based on inflation increases by an average of 3% per year, which is a general reflection of inflation rate increases in many developed countries over the last decade or so. The costs in this table include cost of goods sold and operating expenses:
|
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
|
Revenue
|
$500
|
$500
|
$500
|
$500
|
|
Costs
|
$400
|
$412
|
$424
|
$437
|
|
Profit
|
$100
|
$88
|
$76
|
$63
|
In 4 years the profit on this item dropped by 37%. When businesses cry about sliding profits, the majority of the time it is because they have not sat down and reviewed their prices.
What if I told you that I could increase your bottom line by 73% over the next 12 months, without increasing sales? Even if you factored in that your costs would rise by 3% due to inflation.
Would you believe me?
Would you believe me any more if I told you that all you had to do was increase your prices by a measly 10%?
The reason that you have not increased your prices is because you have not had enough compelling reasons to convince you that you should take the plunge. Here we are going to show you how to overcome your fears by simply giving you proof, using some really simple numbers.
All you need is a sales report to show you how many units that you sold throughout the year, as well as a profit and loss statement that will display your revenue and expenses for the year. Here is an example below;
| Revenue |
$100,000 |
| Units sold |
1,000 |
| Average unit sale |
$100 |
| Expenses |
$90,000 |
| Units sold |
1,000 |
| Average unit expense |
$90 |
So the average unit profit is $10, and the calculation for this is below;
Average Unit Sale ($100) - Average Unit Expense ($90) = Average Unit Profit ($10)
Now if you increase your price per unit by 10%, and factor in increases in costs of 3% for inflation, your average unit profit will look like this;
Average Unit Sale ($100) - Average Unit Expense ($92.70) = Average Unit Profit ($17.30)
Wow, that is a 73% increase in your bottom line! And all that was done was increase price by 10%. You have just moved the returns from your business from just being above a savings account, to a real profitable business.
All without an increase in sales!