| Small Changes Make The Difference |
| If you are going to make your business more profitable, you must have a strong understanding of the impact that small changes can have on the business. |
Company A has 50 enquiries per day, with a conversion rate of 50%, so they deal with 25 customers each day.
The average unit price of the goods is $40, and on average, each customer buys 2 units. The average individual sale is $80. The total daily sales are $2000.
What happens if we make the following changes?
Increase conversions to 60%
Increase price by 10%
Increase units purchased by 10%
Now Company A has 30 customers per day, average price of $44 and an average quantity purchased is 2.2. The average individual sale is now $96.80.
Total daily sales have increased to $2,904?an increase of 42.5%.
If the business operates 5 days per week, over a 12-month period, this results in increased sales of $235,040, from $520,000 to $755,040.
If the business had an original gross profit margin of 40% the increase in price would lift the gross profit to 45.5%. The overall result is an additional $135,200 added to the bottom line.
Increases to conversion rate, price and quantities purchased become three strategies for growth. How can you increase our conversion rate? How can you increase the average quantity purchased? What small changes can you make that will have a massive impact?
Should you decrease price to stimulate sales?
The impact of a price decrease on your level of sales and profitability can have a greater impact than you may think.
If the business above were to reduce its price by 10% (given a gross profit margin of 40%), the number of units sold would have to increase by 33% to ensure that the same level of profitability is maintained.
Are you prepared to increase your volume by 33% just to make sure that you don?t lose any money?
On the other hand, if the business increases its prices by 10%, sales volume would have to drop by 20% before the profitability is adversely affected.
If we assume that the number of customers and quantities sold remain the same, we can see the impact that a price decrease and increase has on the overall profitability of the business:
| Item
| Now
| Price drop of 10%
| Price rise of 10%
| | Sales
| 520,000
| 468,000
| 572,000
| COGS
| 312,000
| 312,000
| 312,000
| Gross Profit
| 208,000
| 156,000
| 260,000
| Overhead Costs
| 150,000
| 150,000
| 150,000
| Net Profit
| 58,000 / 11.1%
| 6,000 / 2.1%
| 110,000 / 19.2%
| | | | |
Which is better, a price decrease or a price increase? What strategies are you going to implement to increase the prices in your business?
30th-September-2003 |
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