Today I want to teach those who have a Business or those thinking of starting a business a very simple, very powerful, and almost effortless way to increase profits. And although what I will explain is pretty obvious, most businesses would surprisingly go the complete opposite of what I will share. You might even be practicing this in your business or are planning to do this when you launch your business.
So if you want to increase your profits with minimal effort, then my dear reader, please read on.
Almost all businesses I know at one point in time will resort to “discounting” as a way to increase their sales. In fact, this practice has become ‘gospel’ to starting and even growing businesses that it becomes the ‘go-to’ tactic when they want to get more sales. I myself have discounted a lot in the past and even though it gets additional sales, I slowly and painfully realized, that it does something that you will not immediately notice, it will inevitably decrease your overall profitability.
So over the years, I have learned how to increase sales and profitability without resorting to discounting. And believe me, this will be a lesson you would want to take to heart and try on your business soon. But first, let me share why you should take this simple lesson seriously by showing you the math.
Let’s say your product’s selling price is P50 with a profit margin of 30% or P15. Now, the number of people buying that product is 10 per day. So, if we do simple multiplication, your total profit for the day will be P150 (10 people X P50 X 30%) or ( 10 people X P15 profit ).
Now you feel your sales are low and you want to increase it, and what do you immediately think of? “let’s give a 10% off promo” or let’s do a “Buy 1 take 1 promo”, etc. Am I right? Of course I am because I’ve done it myself many, many times
So, let’s take a look at the 10% off promo. 10% off your selling price means your P50 now becomes P45 (P5 discount). Now, let’s assume that your promo produces 1 more customer or 11 customers for the day, then your total profit will now be P110 (11 people X P10 profit). P10 because it used to be P15 but I discounted P5 so my new profit is now P10.
If you get 2 more customers for the day, then profit becomes P120 (12 people X P10 profit)
3 more customers, P130 profit
4 more customers, P140 profit
5 more customers, P150 profit
So what can we conclude in this simple example? If I give a 10% discount, then I would need to add at least 5 more people or 50% more buyers just to have the same profit of P150! What more if you do a buy 1 take 1 promo or a 50% discount? Well, you do the math and you’d be very depressed I assure you.
So here’s my first lesson for you to increase your profit without any effort at all. STOP giving discounts if you really don’t need to.
Easier said than done you say? Well, read on as I’m not yet done. In fact, in my businesses, I will go a step further by doing the complete reverse of what most of my competitors will typically do, I increase my prices by at least 20%. Now I know what you are thinking — yikes! Less people will buy from me if I do that — Not necessarily true, but for the sake of argument, let’s take a look at the math again and see what happens when you start losing some customers:
The original profit = P150 with 10 people @ P50 @ P15 Profit. I increase my price to P60 (add 20%) @ P25 profit from P15.
If my volume drops by 1 person to 9 people/day then, my profit will STILL be P225 (9 people X P25)
8 people/day, P 200 profit
7 people/day, P175 profit
6 people/day, P150 profit still
Now even if I lose 4 people or 40% of my volume, I will still get the same original profit.
Okay and I know what you are thinking, increasing prices are in many, many cases viewed by a lot of businesses as “Taboo” or “Evil” or “Un-filipino-like”. And I would agree in some cases, but I do not in many. I do not agree that businesses have to resort to “I’m-a-good-guy-so-I’ll-price-it -just-to-get-by” pricing or “Buy-from-me-because-I’m-the-lowest-priced-in-the-universe”. Thinking that way will surely run your business to the ground sooner or later.
If you are worried about those very thoughts, I want to assure you that you do not have to be a Bad guy when you raise your prices. Far from it actually, and you certainly do not have to be the lowest priced for you to have top sales. What I have learned throughout the years is that price is NOT the only thing that the customer is concerned with. Customers for the most part are concerned with 2 other things and sometimes even more so compared to price. 1.) Quality /assurance and 2.) if it solves their problem.
And so, the 2nd lesson I will leave you with in this article will be this: have the courage and the strategy to increase your price by communicating and even going so far as to guarantee the quality of your product and making sure that it solves a problem that the customer is willing to pay a premium for. If you can do that, you are on your way to increasing your profits with minimal effort.