Business musings

Articles and thoughts about all things innovative and strategic

01
Feb

I went to the Barclays ‘Let’s Talk More Profit’ seminar in the latter half of last year and have been meaning to post this blog for a while. Robert Craven, author and consultant, spent half a day talking to around 200-300 companies about how to increase their profits. I found it really useful and practical, so thought I’d share the key message.

There are only 5 ways you can increase your profits…
and not all of them are created equal!

Here are the only 5 ways you can increase your profits:

  1. Raise your prices
  2. Lower your direct costs
  3. Fix the underperformers
  4. Increase volume
  5. Lower your overheads

And the winner is…

We looked at each of the five methods of increasing profit, and looked at how effective they each were. In reality, increasing your prices is by far the most effective way of increasing your profits.

Let me give you an example:

If you sell a widget at £100, with a cost of sale of £70, this creates £30 gross profit
However, if you reduce the price by just 10%, and sell it at £90, with the same cost of sale of £70, this only creates £20 gross profit.

Therefore, you would have to sell 50% MORE widgets just to make the same amount of profit you had been previously.

So, raising prices has the opposite effect. Sell at £110, less cost of sale £70 = £40 gross profit. A 33% increase in gross profit.

The counter argument is that, based on the supply and demand curve, you would expect to sell fewer widgets if you are charging a higher price, therefore making less money. The bit about selling fewer is true; the bit about less money depends on the demand curve. There is more profitable flex in this than you might imagine.

Say you sold 100 widgets at £100 making a total gross profit of £3000 (£30 profit on each widget x 100), then increased your prices to £110. You would now only need to sell 75 widgets to make the same profit (£40 profit on each widget x 75 =£3000), resulting in less work (and therefore overheads) for the same amount of money.

In addition, it is likely that your ‘worst’ customers are also the most price sensitive and will take up the majority of your time.

So, let me put it this way…

If you would like to work less, earn the same, and get rid of your least favourite customers… consider putting your prices up!

You can then spend the time you have saved looking for new, higher paying customers. When you have found these new customers and returned to selling 100 widgets, you will now be making £4000 profit instead (an extra £1000).

The only proviso is to be aware of demand sensitivity: if your business’ particular demand curve is very price sensitive (for example, if you were raise to prices by 10%, you would lose over 25% of your customers) you will then end up making less money, not more. That said, this sensitivity may be counteracted by upgrading your branding, customer service, or product/service differentiators to justify the price increase and thereby retain more existing customers. Raising your prices might mean raising your game, but then when has that ever been a bad thing?!

And finally, what about the other 4…?

The other 4 listed above are also very valid. Robert Craven suggests you work down in order, from 1 to 5. Implement each element and then move onto the next. By working in order, you ensure that you start with those that will have the most impact on your business’ profitability.

So, why not consider giving it a go!

One Response to “The (only) 5 ways to increase your profits”

  1. The (only) 5 ways to increase your profits – Stocker Partnership | Marginalyser said on May 16th, 2014 at 5:56 pm,

    [...] via The (only) 5 ways to increase your profits – Stocker Partnership. [...]

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