Are you charging enough for goods and services? Many businesses could charge more for their goods and services. A small increase in what a business charges can make a big difference to their bottom line. Charging as little as 1% more can make a tremendous difference. In this article we will discuss how charging slightly more can make a dramatic impact on a business.
Example
Consider this example. Let’s say a business owner tells a potential buyer that they could safely increase their prices by 1.5%. This price increase would not cause any negative impact to sales or business disruption. The shrewd buyer realized that the business, which has $50 million in sales, is leaving almost a million dollars on the table by not increasing its prices by 1.5%. After purchasing the business, a smart buyer will realize that this small price increase will achieve a sizeable increase in profits.
In Rafi Mohammed’s best-selling book, The Art of Pricing, he explores the area of pricing. He notes that one of the biggest misconceptions in business is to believe that you should base a product’s price on the cost of the product. In his book, Mohammed points to several examples. One example he points out is the fact that McDonald’s keeps entrée prices attractive with the idea of making up profit shortfalls in other areas. McDonald’s profits on hamburgers are marginal. However, its profits on French fries are considerable.
Mohammed believes that companies should always be looking to develop a culture of producing profits. He states, “through better pricing, companies can increase profits and generate growth.” Mohammed points out that it is through what he calls “smart pricing” that it is possible to extract hidden profits from a business.
In the course of their day-to-day operations, business owners often fail to place sufficient importance on pricing. Any business looking to achieve more should stop and take a good look at its pricing structure.
Buyers should be vigilant in their quest to find businesses that can safely increase prices without experiencing any disruption. Small changes to pricing can have a profound impact on a company’s bottom line.