NFIB

When Five Percent Plus Five Percent Can Equal Fifty
04/ 02/ 2002


How many times have you said to yourself, or heard one of your sales staff say, "It doesn't really matter that we reduced our price five percent. We got the sale, didn't we?" And how often have you neglected to enter strict negotiations with suppliers to reduce costs as much as possible, say five percent or more? In today's Workshop, Jeffrey Moses shows how even these small percentages can make a tremendous difference in your overall profitability.

If your business works on a rather narrow profit margin, raising your prices just 5 percent will have a great affect on your bottom line. As an example, say your company's gross revenues from sales are $1 million. At 15 percent profit margin, your total net profits are $150,000. If you raise your prices just 5 percent, your total gross revenues increase $50,000. That means you make $200,000 net profit, instead of $150,000 -- an increase of 25 percent.

Using the same example as in the previous point, if you reduce costs just 5 percent, you'll similarly have an increase in net profit of $50,000 -- also a 25 percent increase. Totaling up the results of a 5 percent increase in price and a 5 percent cut in costs, you can increase your profitability a total of 50 percent.

This is all fine and good, you may say -- but how do you go about raising your prices and reducing your costs? Every company and every industry are different, but in general it can be said that most businesses are extremely reluctant to charge the full price they can receive for products sold or services rendered. In his fine book, "Double Your Profits in 6 Months or Less,"(Harper Business, 1995, $13 in soft cover) Bob Fifer says company owners should ask themselves this question: "How much business would I really lose if I raised my prices 2 percent, 4 percent, 5 percent, or even 7.5 percent?" He notes that most businesses experience a bit of grumbling among customers at a 2 percent or 5 percent increase (depending on the industry, of course) -- but hardly any will stop buying.

On the other end of the spectrum, Mr. Fifer suggests that most people shy away from driving a hard bargain with suppliers, even though most will cut their costs an additional 2 to 5 percent. Previous workshops have discussed ways to cut supplier costs, but in general the best way is to determine exactly what you want to pay, then work with suppliers to get to that price. If you set a5 percent overall reduction in price as your goal, work hard to achieve that level.

There are, of course, other ways to increase profitability. Operational costs run high in many types of businesses. These include, among others: salaries, marketing, shipping, quality control, employee benefits, and ongoing office expenses. These can be reduced to achieve the above-discussed goals -- but you have to work harder to achieve cuts in these areas.

Consult and work with your business adviser or accountant when considering the ideas presented in this Workshop. Don't overlook the considerable increase in profitability available through making a few simple decisions -- and sticking to the decisions once they're made.

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