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How to reduce the biggest cost in your business

We’re revisiting pricing again because it’s the fastest and least expensive way to improve profits.

Low prices and discounts are also the biggest costs to a business, which is never shown in the financial accounts. As accountants we don’t know what you could have charged. So, one of the things you could do is keep a track and review this when we do your accounts.

In our experience, many start-up and small business are afraid to charge a high price because they are small or new. But, that doesn’t matter…what matters is the perceived value. It’s important to understand that isn’t value from your perspective, but value as perceived by your customer. This is vital because you are in control of what the client perceives.

The trouble with low prices and discounts is that it makes you busy and less able to deliver an exceptional customer experience. This means the perceived value will be lower – this is an ever decreasing circle.

To highlight how much extra work you need to do here’s an example of the way low prices and discounts can impact your profitability based on selling your product or service at a gross profit of 40%,

Offering a 5% discount means you need to sell 14% more volume to make the same amount of gross profit.

Offering a 10% discount means you need to sell 33% more volume.

Offering a 20% discount means you need to sell twice as much!

Offering a 30% discount means you need to sell four times as much!!!!!

The thing is that small businesses have limited resources so we will struggle with the need to do 33% to 400% more work. So, the smart strategy is to go for the premium market, the buyers who are value sensitive because these numbers also work in reverse.

The higher your price, the less volume you have to produce for a given amount of profit. Even a small price increase can generate significant additional profit.

A Key Success Driver of your business could be your ability to build and capture your customer’s perceived value. Even thinking like this could give you new insights which will lead to you be able to charge higher prices and make more profit with less work.

Image from Flickr by Twentyfour Students.

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