STOP the Madness!
As a business owner it is imperative you understand how to price your products or services and understand the impact discounts have on your business.
Most small businesses struggle with their pricing because they don’t understand what the industry, or better yet their competitors, are charging. Priced too low and prospects may not see value. Priced too high and the prospect will find a better value at a lower cost.
Additionally, some business owners don’t calculate the gross profit margin correctly on their products. Gross profit margin is calculated as a percentage of revenue. There are many sources of data that can help business owners understand what their industry standards are for gross profit margin. The example below is a guide for business owners to understand how to correctly calculate gross profit.
Example – selling widgets
Materials = $100 + $75 labor = $175 CoGS
You want to make a 35% profit on EACH one sold
If you answered B, YOU are correct! To calculate, you take the inverse of 35% - or 65% - and calculate it this way: Price = $175 / .65. The correct price of the widget would be $269.23. I have seen business owners incorrectly calculate this way: Price = $175 * 1.35 which is $236.25.
The example highlights the importance of pricing your products correctly to achieve the gross profit margins you need for your business.
Who doesn’t like a discount? I know I do! However, as business owners, we need to calculate the impact of that discount. Typically, business owners “discount” their price and end up DESTROYING their profit margins.
Depending on your margin, if you discount your price by a mere 10%, you now must sell 50% more just to break even. Did you catch that? 50% more…WOW!
If your CoGS for the widget is $70 and your price is $100, the 10% discount means you’re selling it for $90. Your profit dropped to $20 versus the $30 you were originally making. Now, you have to sell 50% more widgets to get back to your original profit margin.
100 widgets x $30 = $3,000
150 widgets x $20 = $3,000
Think about that for a minute!
For a measly 10% discount, you now have to sell 50% MORE… just to break even!!!
When was the last time you saw someone offer ONLY a 10% discount??? Most businesses offer 25% - 40% discounts! Research shows that discounting does not impact a prospect’s buying decision unless that discount is 40% or more.
Let that last paragraph sink in…
When you discount your price, you lose the full value of every dollar you discount. Innovate your business so you offer more value than your competition…even if that means increasing your price!