Adjusting pricing to increase profit

Growing your business isn’t always about finding new markets or building sales. It could be improving your net profit margin within your existing business (especially if it’s difficult to find new customers).

The easiest solution of course is to increase your prices. Profit should grow overnight, but there are risks as demand could fall if customers think you’re too expensive and it could create an opportunity for competitors to lure your customers away.If the price elasticity of what you sell is low (a price increase doesn’t affect demand much), it’s possible customers may accept a price rise without any undue stress. A twenty-cent increase in a cup of coffee could go unnoticed.

However, getting your pricing right is a balancing act between offering value for money to customers while charging as much as you can. To maximize your profit, consider the following pricing and costing strategies to help.

1. Be absolutely sure everything has a net margin

It’s easy enough to calculate what something costs you and then add a margin. But often there are hidden costs which if added to the end result, could be costing you money. A good example: you’re selling 1,000 units of product A with a $100 margin (bringing in $100,000 gross margin), yet you have a dedicated salesperson, office and floor space that costs $150,000/year. It looks like you’re clearing a decent margin, but in fact you’re losing money with a net margin of minus $50,000 once you consider those associated costs.

2. Charge what the market will bear

You don’t need to charge the accepted going rate if you think the market either won’t accept it (it’s too high), or you could charge more (it’s too low). Extra consideration needs to be given when underpricing (to generate initial sales or you feel the need to be cheaper to compete) or overpricing (charging a premium but you fail to communicate these benefits and struggle to gain customers). As a strategy it’s useful to continually monitor your pricing to make sure you have the right balance to not only charge a fair price, but also make a profit which keeps your business growing.

3. Be careful when discounting

It’s really tempting to offer discounts to customers. You might feel good about generating more sales, and your customers will be happy but your bottom line can suffer if the discounting is not part of an overall strategy (for example to drive volume sales or part of a positioning strategy against competitors. Consider discounting as a strategy only if you’re:

  1. Running a short-term promotion to introduce a new product or gain new customers

  2. Needing to clear old or excess inventory

  3. Using a product or service as a loss leader to sell a more expensive item or recurring sales (like razor blades).

  4. Buying inventory at a discount yourself and can pass on the saving.

If you do want to reward new or loyal customers, consider keeping the price steady and add in free products and services which you’ve marked up at full price as the ‘discount’.

Selling items with a better margin will automatically increase your profit without needing to increase your sales volume.

4. Focus on higher margins

If you can, concentrate on promoting and selling the products and services that have the largest margins (and in reverse phase out anything that’s low). Even if you’re a business that trades on very low margins and high volume, there will still be some of what you sell that has a better margin (even if it’s slim) than others. It should be relatively easy to list your top margin products and triple-check these are the ones you and your staff try and sell the most.

With high margin products you could consider:

  1. Devoting prominent shelf space (physically or online)

  2. Training staff on what to promote

  3. Giving staff incentives or bonuses to selectively sell

  4. Bundling with lower margin products or loss leaders

Selling items with a better margin will automatically increase your profit without needing to increase your sales volume.

Next steps

Finally, consider how to combine some of these strategies and then review on a regular basis to help your prices deliver the profit you seek and customers get the value they want. Explore our Profit Increase Calculator and build a variety of scenarios to uncover profit possibilities.

If you want to talk about your business banking needs, feel free to contact your TD Account Manager or find an account manager near you.

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