IN THIS VIDEO, YOU WILL LEARN:
- How a 20% increase in price can boost your sales for up to 200%
- How you will still be able to achieve the same results even if you lose some of your customers in the process
Let’s talk about “How a 20% increase in price leads to a 200% increase in profit”.
And then we’ll even see after you consider the fact that you might lose some customer with your price increase.
Pricing always comes up and always makes for a hot topic.
I generally suggest raising your price if you are having cash flow issues and particularly right now as the labor market gets crunched and materials kind of go up in price with the recent tariffs that have been going on.
At least we’re experiencing that in my industry where we’re dealing with a lot of aluminum products that are getting taxed.
So prices are going up.
Labor is at a shortage that we gotta pay premium.
Prices need to go up.
But everyone is always concerned: “Well what if I lose customers when I do that?”
“And you know, for the mere 20% increase, that’s not really worth it to my bottom line.”
But I’m going to show you just how the 20% increase in price impacts your bottom line here. Let’s take a look at my screen and the Excel sheet.
Let’s just say as a starting point we’re talking about a company that does a $100K a month in sales.
Their labor is at $40K or 40%.
Material is at $30K.
All said and done.
The gross profit for this company is going to be $30K or 30%.
And then they’ve got fixed costs: You know your rent for your building, coffee for the coffee maker, administrative staff, etc.
The fixed costs generally stay about the same every month or they should that’s why they’re fixed.
In the real world they do vary a little bit but not much.
In the textbook world they stay the same.
They’re fixed costs.
So we’re going to say they’re $20K.
At the end of the month this company is left with a profit of $10K.
Now let’s say they raise their price by 20% here.
So we’re going to raise the price 20%..and..did the formula wrong on that.
What am I doing wrong in Excel…
I’ll reformat that cell and put that into currency.
Should do up.
So raise the 20% and next thing you know you are up at $120K.
And I put this in the wrong column so let me just correct that real quick.
Formatting looks good.
So, you raise your price to 20%.
You go up to a $120K.
Your labor and material costs stay the same.
So, they’re still at $40K and $30K respectively.
Now your gross profit, of course, has gone up.
You went up to $20 in gross profit.
The exact amount that you increase through sales revenue.
Now your fixed costs also remain the same here.
Fixed costs remain the same.
And then your net income, look at the change to that.
Let’s get the formula right but we already can tell that from basic Math what it’s going to be.
Your net income didn’t just go up 20% it actually went up 200%.
Up from $10K to $30K. So 20% increase in price leads you up to a 200% in net income.
Now let’s just say you lose 20% of your customers.
So, your workload also goes down 20%.
So, let’s just say we lose 20% of our customers here.
Let’s a take a look and see what this is.
We’re going to start from a $100K and we’re going to cut that by 20%, so multiply by 80%.
But then it’s also going to you know, consider our price would have gone up 20%.
We’re going to do this. Okay.
So, it brings us in at $96K in revenue.
But we’re doing the same amount of work that means we can cut back labor and the materials 20% as well.
So, we’re going to cut that back.
Cut back the labor.
Follow the same formula down.
Labor and materials goes down 20% while our price had increased 20% there.
And our gross profit?
We’ll take our sales revenue minus our labor and materials now stands at $40K.
Fixed costs also stays the same and then if we do the math on this boom you have a $20K a month net income as opposed $10K.
So, just increasing your price 20% even if you’re going to lose of your customers or miss out on some sales opportunities, your profit, your bottom line, the amount that you take home is still doubling.
So, that’s the power of just increasing your price a little bit even it’s at the expense of losing some customers.
Now, I don’t mean you’re going to go out and price gouge your customers.
You should price fairly relative to the service and value that you are providing.
So, you know, do some competitive research.
Figure out what your competitors are charging.
Figure out what you can do better than them.
How you can differentiate yourself.
Deliver more value.
Give a better customer experience, the experience that most customers are going to want and then position your price accordingly.
nd if you do that if you’re not already doing it you should be able to get another 20% out.
Now, of course, some of that comes with marketing.
You’ve got to reach the right target, demographic.
You got to reach the right audience.
But if you can increase your price just 20%, even if you’re going to lose 20%, you’re still going to increase your net income by a 100%.
And at the same you’re going to work less.
It’s going to be a lot easier on you and your business.
I’d rather be in this column right here than I would be back over here.
And I think it’s all evident for nearly everyone as we can see the difference between net income and net income.
So, keep that in mind when you’re doing your pricing structure.
Just because you’re increasing your prices a little bit 10 or 20% doesn’t mean you’re just getting a 10 or 20% profit to the bottom line.
No, in this case you’re, you know increasing a 20% and keeping your same customer base you’re really getting a 200% increase on your bottom line.