I was giving a seminar recently and it included a section on pricing. What really shocked me was how few people understood how to price properly and just how many businesses were almost paralyzed with fear about raising their prices. Now I understand that we’re in the worst recession for at least 20 years but at least 50% of my audience had not increased prices for more than 2 years. Their argument in a nutshell was that they couldn’t increase their prices because they’d lose too many customers.
I asked them if any of their suppliers training clients had increased prices to them in that time, not surprisingly many of them complained just how many times suppliers had raised prices over the period. When I asked if they had changed suppliers as a result of these price increases they said, without exception, no. In fact they seemed rather surprised that I should even suggest it. I had to find a way to drive home the contradictions in their response so my question had to be carefully considered, it was, “If you’ve accepted price increases from your suppliers why won’t your customers accept price increases from you.”
At this point there was a lot of murmuring and a few brave souls suggested because they were small companies there would be less loyalty and their customers would move. I simply can’t accept that as a valid argument and experience shows that most customers are immune to price increases. I decided then to demonstrate how raising your price delivers more profit even if some customers leave.
Let’s assume you sell ten units of a product at £10 each giving you a sales income of £100. Of that £30 was fixed cost and the variable cost was £6 per item sold equaling £60 which when subtracted from your sales total gives a profit of £10. In our second case we raise our prices by 10% which leads to a fall in demand of 10%. So we now sell 9 units at £11 pounds each total sales are £99, fixed costs remain at £30 and variable costs are only £54 leaving a profit of £15. In our third scenario we reduce prices by 10% which in turn leads to a 10% increase in sales. We still only have £99 in sales as we have sold 11 units at £9, however variable costs have gone up to £66 leaving a paltry £3 profit.