I’ve noticed another strong relationship between your profit margins and the amount of money you take home from your business. Let’s examine the interaction between your prices and profits. I’m not about to suggest a blanket price increase as a simple way to increase your net profits. All of us are constrained by local marketplace pressures that put a limit on our prices. And some common services, such as drain stoppages in my market, have become so fiercely competitive that they are not likely targets for increases.
Big Effect: However, small increases can have a tremendous effect on your bottom line. You might guess that a 5 percent increase in what you charge for a $20 part would give you a corresponding 5 percent increase in profits. That seems to make sense. But let’s take a closer look. Let’s say you paid $12 for that part, which you sell for $20. That gives you an $8 gross margin. Increasing the price a mere 5 percent means raising the sale price to $21 — which certainly won’t put you out of business.
As a result, your gross margin goes from $8 to $9, which comes out to an increase of 12.5 percent. That translates into keeping $112.50 for every $100 you used to take home — simply for raising material prices by just 5 percent. See what I mean about the tremendous effect such small changes make? The same return could be realized from increases in your labor charges or other fees as well. I’m sure that at least some of the service and repair jobs you offer are worth examining for such relatively modest increases.
The effects of such a small change in your selling price is all the better, if you can also find ways to shave your costs. For example, let’s say you’ve found a way to reduce the price you pay for that $12 part by 5 percent, or $11.40. If you can then sell it for $21, your margin increases to $9.60 — giving you an increase of 20 percent over your former margin of $8.
It’s equally valuable to point out that small changes in your own costs — the kind you might easily persuade yourself to ignore — can also have a devastating effect on your bottom line. For example, have your parts prices increased recently? What about your overhead costs such as insurance, taxes or rents? Did you pass on any of these extras to your customers? I know, I know. There are limits to passing on added costs just as there are for added prices. But businesses that repeatedly absorb price and overhead increases face a major squeeze on their margins.
Here’s what I mean: Let’s say that the cost of the item you continue to sell for $20 has increased to $13 from $12. That means your margin has slipped to $7 from $8 — a 12.5 percent decrease. In other words, that means for every $100 you used to enjoy, the fruits of your labor now bring home $87.50!
Double Leverage: There’s a hidden benefit to boosting your margins, besides getting to keep more of the money that would otherwise go right through your hands. For every dollar you can add to your company’s profits, you may soon find that you can get a multiple of that dollar when you want to sell your business. Any business is valued by measuring profits first. Adding to your profits today could produce many times that a few years from now.
So you now have double leverage. As margins increase a little, profits soar. As profits climb, the worth of your business increases too.
But it wouldn’t be fair for me to suggest an analysis of your prices without giving you an edge in the marketplace to more than justify any increases. You’ve probably heard me say this before — customers want, and will pay for, service. No one price shops for poor quality service.
If you are competing on price alone today, you are missing the boat. You need respectable margins to maintain the best service available. If your techs are not professionally trained in every aspect of top quality customer service — how to greet the customer, analyze the job, sell additional services once they’re in the door — your business is not putting its best foot forward.
From your perspective as owner or manager, you need the most up-to-date training, too. Understanding your costs and techniques to cut costs are essential, whether on uniform expenses or truck operations or inventory controls — and dozens more opportunities to produce winning numbers in your business.
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