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Answer Upon - Higher Prices Lead To Higher Profits - Part 1
I am doing what you do, sitting at my computer, trying to get my thoughts out of my head and into a written form that will help you make a decision. In this particular case, I am trying to write a few intelligent remarks about sounding conversational on paper. You know, how to write a fundraising letter that sounds like it came from the mind of a person and not an institution.I suppose the first thing I can tell you is that you should write the way you talk, unless, of course, you talk in halting sentences punctuated with “ya knows” and “like, you know what I mean?” And if you usually write fundraising letters that are signed by someone else, your executive director, fo
How many units do you need to break even? 500.
Five hundred? That's five times your original number.
Do you really think you can sell five times what you did before - at least without significantly raising your overhead and your variable cost of sale?
How many times have you done just this in response to competitive pressures?
How many times have you cut prices because you thought it would help you sell more?
:(:(:(
What we've just done is a simplified version of what's called margin analysis, and I hope it gives you a glimmer of what can happen when you mis-price.
F
The secret to increasing sales doesn't lie in choosing just the right marketing tactic for each of your businesses. The real problem that's experienced by many entrepreneurs--a damaging lack of focus. Plenty of entrepreneurs make this dangerous mistake. They try to market more than one business at once, or they tackle too many targets for a single business. Suddenly, they discover that their time and budgets are fragmented beyond their ability to produce positive results. The solution is to get--and stay--focused. This single alteration can actually reduce your marketing costs and increase sales. The trouble with trying to market several businesses at
How did you decide on your current pricing? Did you conduct market research to understand what prospects would pay? Or did you compare yourself to your competitors and base your price on that? Or was it a crapshoot, and random shot in the dark?
These are the ways most people do it, and they are all wrong. Because the price you set for your products and services is more important than you think.
The following few paragraphs are a bit number heavy, but stay with me because this will be really valuable for you to understand.
Let's say you sell a high margin product - information products and software are two good examples. Your price is $60, and your costs are $10 - that means your gross margin (selling price - your costs) is $50 each time you sell one unit. Let's say further that your overhead is $5,000 per month. If you sell 100 units you'll break even, right?
Now you want to sell more, and decide you can take some business from a competitor by lowering your price - temporarily. You lower it to $40 - a 33% price cut, and not uncommon.
Your costs remain $10 and your overhead is still $5,000, only now your gross margin is $30 - 60% of what it was before. And how many units do you need to break even now? 166! That's 66% more unit sales required to make up for the 33% price cut!
But what if you're feeling very aggressive and you cut your price in half (also not unheard of) to $30. Now you have to sell 250 units - just to break even! That's 2-1/2 times as many as before. How easy do you think that's going to be?
Let's use a different example - something that has real manufacturing costs. This time, your product sells for $100, and your cost of goods are $50 per unit, for a gross profit of $50. Same $5000 overhead, same number of units to break even. Now imagine you cut your price 20%, to $80, leaving you with $30 of gross margin. You need to sell 66% more units. Ouch!
What if you cut the price to $70. This 30% price cut means you have to sell 2-1/2 times more units - just to stay even.
Let's go further...
Competition is really heating up and you think that matching them cut for cut is the way to go. The price for this amazing widget of yours is now a bargain basement $60.
(Shucks, that's only 40% off your original price. Salespeople and business owners do this every day.)
How many units do you need to break even? 500.
Five hundred? That's five times your original number.
Do you really think you can sell five times what you did before - at least without significantly raising your overhead and your variable cost of sale?
How many times have you done just this in response to competitive pressures?
How many times have you cut prices because you thought it would help you sell more?
:(:(:(
What we've just done is a simplified version of what's called margin analysis, and I hope it gives you a glimmer of what can happen when you mis-price.
Fo
In direct mail lore, there's a rule stating that you can measure the success of your efforts by a minimum response rate of 1-2%. In other words, if you send out 10,000 pieces, you'll have a successful mailing if at least 100 recipients respond to your offer. (One percent of 10,000 is 100.)That's one view of direct mailing success. Permit me to offer a different perspective: one from the small business world. Specifically, I'm referring to those small business people who work by and for themselves. Call them "One-Man Bands," "Working Soloists," "Free Agents," or whatever you'd like.To help you remember these two perspectives
Let's say you sell a high margin product - information products and software are two good examples. Your price is $60, and your costs are $10 - that means your gross margin (selling price - your costs) is $50 each time you sell one unit. Let's say further that your overhead is $5,000 per month. If you sell 100 units you'll break even, right?
Now you want to sell more, and decide you can take some business from a competitor by lowering your price - temporarily. You lower it to $40 - a 33% price cut, and not uncommon.
Your costs remain $10 and your overhead is still $5,000, only now your gross margin is $30 - 60% of what it was before. And how many units do you need to break even now? 166! That's 66% more unit sales required to make up for the 33% price cut!
But what if you're feeling very aggressive and you cut your price in half (also not unheard of) to $30. Now you have to sell 250 units - just to break even! That's 2-1/2 times as many as before. How easy do you think that's going to be?
Let's use a different example - something that has real manufacturing costs. This time, your product sells for $100, and your cost of goods are $50 per unit, for a gross profit of $50. Same $5000 overhead, same number of units to break even. Now imagine you cut your price 20%, to $80, leaving you with $30 of gross margin. You need to sell 66% more units. Ouch!
What if you cut the price to $70. This 30% price cut means you have to sell 2-1/2 times more units - just to stay even.
Let's go further...
Competition is really heating up and you think that matching them cut for cut is the way to go. The price for this amazing widget of yours is now a bargain basement $60.
(Shucks, that's only 40% off your original price. Salespeople and business owners do this every day.)
How many units do you need to break even? 500.
Five hundred? That's five times your original number.
Do you really think you can sell five times what you did before - at least without significantly raising your overhead and your variable cost of sale?
How many times have you done just this in response to competitive pressures?
How many times have you cut prices because you thought it would help you sell more?
:(:(:(
What we've just done is a simplified version of what's called margin analysis, and I hope it gives you a glimmer of what can happen when you mis-price.
F
Some of the most successful businesses in existence today started in a box room, bedroom or garage. It isn't how you start out to make money at home that is important. What really matters is that you had the courage to begin.With a home based business, you are your own boss, or your own worst enemy. It is now your responsibility to do things that will build your business, instead of someone elses. To make money online, you must be online. Basic but true information...You now have what millions of others do not have, the flexibility to work your own hours. Although you may think life will become so much better, you will need to put in more hours than normal to sta
But what if you're feeling very aggressive and you cut your price in half (also not unheard of) to $30. Now you have to sell 250 units - just to break even! That's 2-1/2 times as many as before. How easy do you think that's going to be?
Let's use a different example - something that has real manufacturing costs. This time, your product sells for $100, and your cost of goods are $50 per unit, for a gross profit of $50. Same $5000 overhead, same number of units to break even. Now imagine you cut your price 20%, to $80, leaving you with $30 of gross margin. You need to sell 66% more units. Ouch!
What if you cut the price to $70. This 30% price cut means you have to sell 2-1/2 times more units - just to stay even.
Let's go further...
Competition is really heating up and you think that matching them cut for cut is the way to go. The price for this amazing widget of yours is now a bargain basement $60.
(Shucks, that's only 40% off your original price. Salespeople and business owners do this every day.)
How many units do you need to break even? 500.
Five hundred? That's five times your original number.
Do you really think you can sell five times what you did before - at least without significantly raising your overhead and your variable cost of sale?
How many times have you done just this in response to competitive pressures?
How many times have you cut prices because you thought it would help you sell more?
:(:(:(
What we've just done is a simplified version of what's called margin analysis, and I hope it gives you a glimmer of what can happen when you mis-price.
F
It has long been acknowledged that it is easier and cheaper to get more business from your existing customers than it is to get any business from somebody who has never done business with you.Your customers already know you and their business is more profitable for you because there is no advertising cost involved.A referral system, upselling and backend selling are all worth trying if you wish to increase the income you get from your customers. They can be used for marketing online or offline and they cost little or nothing to put into practice.It is a good idea to instigate a system of getting referrals from satisfied customers. The referral system can g
What if you cut the price to $70. This 30% price cut means you have to sell 2-1/2 times more units - just to stay even.
Let's go further...
Competition is really heating up and you think that matching them cut for cut is the way to go. The price for this amazing widget of yours is now a bargain basement $60.
(Shucks, that's only 40% off your original price. Salespeople and business owners do this every day.)
How many units do you need to break even? 500.
Five hundred? That's five times your original number.
Do you really think you can sell five times what you did before - at least without significantly raising your overhead and your variable cost of sale?
How many times have you done just this in response to competitive pressures?
How many times have you cut prices because you thought it would help you sell more?
:(:(:(
What we've just done is a simplified version of what's called margin analysis, and I hope it gives you a glimmer of what can happen when you mis-price.
F
In order to make sure that you business is running smoothly, you have to keep good financial records. This is one of the issues with which businesses are most concerned because they want to make sure that they are turning a profit and at the same time paying the appropriate taxes to the government. When a business files an income tax return, it has to have all its I's dotted and t's crossed if it doesn't want to undergo a tax audit. That is why all income and expenses have to be carefully documented and all receipts kept.Any income is liable to taxation, even if you do not have any overhead. A simple Internet business making money from Google ads will receive a T4 slip
How many units do you need to break even? 500.
Five hundred? That's five times your original number.
Do you really think you can sell five times what you did before - at least without significantly raising your overhead and your variable cost of sale?
How many times have you done just this in response to competitive pressures?
How many times have you cut prices because you thought it would help you sell more?
:(:(:(
What we've just done is a simplified version of what's called margin analysis, and I hope it gives you a glimmer of what can happen when you mis-price.
For the most part, your price cuts don't automatically enable you to sell 66% more than you did before, and generally - at least not in this universe - you don't sell 250% more, and never, ever do you sell 500% more with this kind of price cutting.
But there is some good news - and it's very good.
Let's look at what happens when you raise your prices.
Remember your high-margin product. It sells for $60 and costs $10 to make.
Through good product positioning and excellent marketing you raise the price to $70. That's only a 15% increase. Now you only have to sell 83 units to break even, and if you sell the same 100 units, your profits go from $0 to $1000. Nice increase...
And that "hard" product - the one with $50 of costs? Raise the price tag 20% to $120, your margins increase to $70, and now your breakeven drops 71, and you make $2000 if you sell the same number of them.
See how this works?
:):):)
You can do this same analysis in a bit more sophisticated way, considering your marketing costs, sales or affiliate commissions, travel expenses if you have them, and so on. You can see the actual pricing effect varies quite a bit depending on these details.
If you have a high-leverage, pay-only-for-results affiliate model, a very high gross margin and almost no fixed overhead, you have a lot of price flexibility. You can cut the price 25% and only need to sell 15% more! That's not too bad at all.
But only in that type of model. If you have a office, some staff, and a physical product - in other words, fixed overhead -lower prices can kill you - and you won't even see it coming.
And higher prices?
They can make you rich.
By now you are starting to see the tragic effects of mis-pricing on the downside, and the marvelously enriching possibilities of raising your prices.
This only works, of course, when you can also increase your value proposition...
Stay tuned for part 2.
Follow this link at the bottom of the page to get a copy of an excel spreadsheet to play with. Get the spreadsheet, plug in your own numbers. It will really blow your mind. Also, feel free to pass this article or the spreadsheet on to your friends and associates. They will definitely appreciate it.
(c) Copyright Paul Lemberg. All rights reserved
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