Thread: How to increase profit by 10% overnight.

Diane will be able to back me up on this one:

Increase your prices by 1%. It costs virtually nothing (new price tags? an hour of staff time?), and because no expense was incurred in making the extra 1% income, it flows straight to the bottom line and depending on your other expenses, should make you an increase in profit of maybe 10% (a study gave this as an average. Yours could be vastly different. I can't remember who did the study, but if I do, I'll come back and cite it).

Cool, eh?

Most customers won't notice a 1% increase. Eg: A $1 widget now costs $1.01.


Get off the computer, you have prices to change! ;-)

Daniel.

I just stumbled across this post again, and it's interesting that there are no other posts. Has anyone tried it? If not, it would be interesting to know the reasons.

I'm going to do this very thing tomorrow in my business. All the prices (except for one set of price-competitive products) are going up by 1%. 10% more for me (well, actually more in my case).

In fact, I've just emailed my store manager. :-) New price tags all round!

Possible if you keep your fixed costs down and have a steady inventory turnover.... Nifty I imargine your Gross Profit would only go up by 1% though.

It's fun to work it through on your own income statement :-) Just add 1% to the gross receipts (or whatever your main income line item is called), and don't change anything else except the profit to reflect the increased income.

Eg: you have $100K income, which goes up to $101K. Your expenses remain at $80K (for example). Your old profit was $20K. Your new profit is $21K. The increase in profit is 5% ($1K/$20K). If you have a slimmer margin (eg: expenses $90K, old profit $10K), then a 1% increase in income equates to 10% profit ($1K extra than the old profit of $10K).

For businesses with excellent profit margins, this benefit is less pronounced, but it's free cash.

However: remember that, depending on your product, this may change the demand on it, which effects sales volume. Unlikely at only 1%, but possible.

Originally Posted by TheGreatBear

When I walk by your store, I'll be asking politely for a 1% discount LOL!

:-)

It's only about 650 miles north of Sydney, Australia. If you're in the neighbourhood, drop in and remember to use the magic password ("Lamborghini") for the discount :-)

Daniel.

Originally Posted by Rawr

Interesting idea that is bound to result in some interesting price ratios.

buy my book for 243.2331!

Do you have change? I only have $243.2340 with me. ;-)

Marketing wise you should know how many people get turned off when the clock rolls over from .99 to 1.00

Careful with what you're suggesting. It's the difference between squeezing pennies and losing dollars.

Originally Posted by carlhuber

Marketing wise you should know how many people get turned off when the clock rolls over from .99 to 1.00

Careful with what you're suggesting. It's the difference between squeezing pennies and losing dollars.

I agree. I did mention it in a subsequent post:

Originally Posted by australianinvestor

However: remember that, depending on your product, this may change the demand on it, which affects sales volume. Unlikely at only 1%, but possible.

It's especially important if the product's price is the primary determinant of a consumer's decision to buy.

Good point - sorry, I didn't want to make a big deal out of it. People won't care much (like in the price of gas) if it goes from 3.23 to 3.24, but they will go ballistic if it goes from 2.99 to 3.00

I'm selling a few shirts over on my website and while the demand is nowhere near large enough for me to feel comfortable fiddling with the prices to see what happens, I'm very concerned with how I set those prices. My older items I've got set at round dollar amounts. My newer items I have set at .99 amounts.

Psychologically you've brought up an incredibly interesting topic!!

Originally Posted by carlhuber

Good point - sorry, I didn't want to make a big deal out of it.

No big deal, it was a good point and I am glad you raised it!

Originally Posted by carlhuber

I'm selling a few shirts over on my website and while the demand is nowhere near large enough for me to feel comfortable fiddling with the prices to see what happens, I'm very concerned with how I set those prices. My older items I've got set at round dollar amounts. My newer items I have set at .99 amounts.

Psychologically you've brought up an incredibly interesting topic!!

Check out some marketing books or stuff on consumer decision making. Price is often used as a substitute measurement for other things, like quality, desirability, etc. If you were to raise your prices, you might make more money per item AND sell more of them. This is often because of consumers' perceptions. "If it's cheap, it can't be as good as the expensive one". I do that as well, sometimes.

I think you're idea makes a great point, however I think it will depend on the industry you are in. Retail stores are probably much less affected in terms of customers value perception when compared with a restaurant.
Using your same logic but making it more applicable to more industries, I think it would be safer to go through your expenses on a certain time basis (monthly, quarterly), and spend an hour or so looking for expenses which could be transferred to a cheaper vendor which won't affect the quality of the product.
Out of curiosity, what type of store do you own?

Originally Posted by mozola

Out of curiosity, what type of store do you own?

Convenience store (where the price change is happening) and a media production company.

another hypothetical scenario is that if you want to DOUBLE your profits, simply eliminate 10% of your expenses.

I am not sure how it the Aussie dollar is holding up vs. cost of goods, but in USA at this juncture all merchants, importers, etc are facing significant increases in costs (cog and expenses) all the while their US$ purchasing power has declined and raising prices to a more-than-ever price sensitive customer can have negative ramifications.

I will go on a tangent in another thread regarding the falling US$ but very stripped down view is that it is harder for American family to purchase same products they once enjoyed without any second thoughts of cost...

On the psychological side Wal-Mart prices everything at .97 so it's "cheaper" than .99, they really DO have the lowest prices!

Question for you then: why not increase 100%? That way your profits go through the roof!

Not to down play anything that has been said, because a simple idea like that is brilliant.

BUT

I think ANY time you increase price you need to first increase the value of the product. I don't care how insignificant the price increase is, 1% or 1,000% the value MUST be there. I personally don't agree with raising prices 1% "just because" Every time I increase tuition, I make sure I am a better instructor, a better salesman, a better leader, role model, and speaker, than when I set the previous price. If I can't say I am better than I can't justify the price increase.

VALUE always wins.

Try this one on for size:

REDUCE your price by 10%
And as a result
SALES go up by 30%

Originally Posted by AroundTheWorld

Try this one on for size:

REDUCE your price by 10%
And as a result
SALES go up by 30%

That depends on the "Price Elasticity of Demand" (in economics terms) for the product, which basically means how sensitive the product is to a price change.

Two examples:

#1) A gallon of milk: If you raise the price, people will likely still buy the milk because it's a necessity. The minor price increase would likely be effective here. The demand for this product is said to be "Price Inelastic".

#2) A Honda Accord: If you raise the price slightly, people will likely look elsewhere when shopping for a car in this segment. They would probably look more closely at substitutes such as a Toyota Camry or a Nissan Altima. The demand for this product is said to be "Price Elastic".

It depends on the market, the products, and the industry. Different pricing strategies work depending on the situation.

Originally Posted by Yankees338

That depends on the "Price Elasticity of Demand"

Be still my heart, someone knows about PED :-)

Very true Yankee.
I remember reading an article a while back about a norwegian mobile comm. provider. They use approx 20 million USD a month on advertising/marketing. They have tried using more, getting more customers, but not as much as the extra costs in marketing were. They have tried using less to save some of their expenditure on marketing, however the sales dropped more than they saved. So all in all, after trying and failing they ended up on approx 20 million USD a month. That works, they increase their sales month by month. So yes, its all about finding the right formula in your market.

Originally Posted by Yankees338

That depends on the "Price Elasticity of Demand" (in economics terms) for the product, which basically means how sensitive the product is to a price change.

Two examples:

#1) A gallon of milk: If you raise the price, people will likely still buy the milk because it's a necessity. The minor price increase would likely be effective here. The demand for this product is said to be "Price Inelastic".

#2) A Honda Accord: If you raise the price slightly, people will likely look elsewhere when shopping for a car in this segment. They would probably look more closely at substitutes such as a Toyota Camry or a Nissan Altima. The demand for this product is said to be "Price Elastic".

It depends on the market, the products, and the industry. Different pricing strategies work depending on the situation.

You the man. Rep up for that one. You go and explain those economics to people