Insight Associates provide outsourced accounting and Finance Director services to ambitious and growing businesses. We work as your only resource or with existing staff to give you complete financial support including monthly management accounts, high level financial advice, robust controls and financial systems, funding and business planning, payroll & compliance, VAT returns and statutory compliance.

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Wednesday, June 01, 2016

Why Haven’t You Raised Your Prices?


2015 looked like a tough year for Coca Cola.


Health-conscious consumers were turning away from fizzy drinks. Add to that the downturn in the dollar, and it seemed likely that the company would take a painful hit.

So what did they do? They raised prices in North America by 4%.

The result? Within six months, a 20% rise in profits. 

Now, I know what you’re probably thinking.

“That’s all right for Coca Cola. They can do whatever they want – people are addicted to their products!

“If we raised our prices, sales would drop. If we want more business, it would be better to cut prices – not raise them.”

Luckily, that’s not true. In almost all cases, the number one thing you can do to increase profits is to put your prices up. Unlike other methods of increasing profits – cutting costs, selling more – it can be done quickly, and the results are immediate.

It’s important to remember that even very small price increases can result in large changes to your profitability (as in the Coca Cola example). How so? I don’t want to get bogged down in figures here, but think of it this way. 

Imagine you’re selling a product for £100, which costs you £80 to bring to market. Your profit is £20.

Increase your price to £105, and your profit margin per item will rise to £25. So, for a small price increase of 5%, your profits have grown by 25%.

You don’t even have to raise your prices by that much. According to research by McKinsey, even a 1% hike in prices can raise your profits by 11%.

Nor do you have to increase your prices across-the-board.  If, for example, you know which of your products or services are least profitable, you can restrict your price rises to them only. Or you could work out which clients are getting the best deals from you, and start charging them more.

The fear, of course, is that if you raise your prices, you will lose some of your customers.
And you’re right. That might happen.

But because you’re charging more, you can afford to lose some sales; you will probably still make more money than before. If you’re really lucky, you will even get rid of your problem customers, those who are squeezing you for every penny instead of making you richer.

Here’s another secret. If you offer stellar service, your best customers won’t mind if you charge them a little more. They’ll probably just wonder what took you so long……!

If that’s a result you’d like to see, but you’re not sure how much to raise your prices by, or which products and services are your least profitable then get in touch. I’d love to help you become more profitable.

Garry Mumford is author of the free guide, The 5-Step Process To Get Your Customers to Pay on Time, Every Time. He is founder and Director of Insight Associates, which since 1992 has been providing owner managed businesses with the financial insight essential for development and growth.

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