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Free Business InformationHigher Prices Lead To Higher Profits - Part 1
by:
Paul Lemberg
I cognize at 1st glance this sounds obvious, but it may be worth it for you to think simply about your prices. At least simply for a moment.
How did you decide on your current pricing? Did you conduct market research to understand what prospects would-be pay? Or did you compare yourself to your competitors and base your cost on that? Or was it a crapshoot, and random shot in the dark?
These are the route most folk do it, and they are all wrong. Because the cost you set for your products and services is much important than you think.
The following few paragraphs are a bit number heavy, but stay with me because this wish be actually valuable for you to understand.
Let's say you sell a high margin product - information products and software system are two nice examples. Your cost is $60, and your cost are $10 - that means your gross margin (selling cost - your costs) is $50 each time you sell one unit. Let's say further that your overhead is $5,000 per month. If you sell 100 units you'll break even, right?
Now you want to sell more, and decide you can take several business from a rival by lowering your cost - temporarily. You lower it to $40 - a 33% cost cut, and not uncommon.
Your cost remain $10 and your overhead is still $5,000, only now your gross margin is $30 - 60% of what it was before. And how galore units do you need to break even as now? 166! That's 66% much unit sales required to do up for the 33% cost cut!
But what if you're feeling really aggressive and you cut your cost in half (also not inaudible of) to $30. Now you have to sell 250 units - simply to break even! That's 2-1/2 times as galore as before. How easy do you think that's going to be?
Let's use a several example - thing
that has real manufacturing costs. This time, your product sells for $100, and your cost of goods are $50 per unit, for a gross profit of $50. Same $5000 overhead, same number of units to break even. Now imagine you cut your cost 20%, to $80, departure you with $30 of gross margin. You need to sell 66% much units. Ouch!
What if you cut the cost to $70. This 30% cost cut means you have to sell 2-1/2 times much units - simply to stay even.
Let's go further...
Competition is actually heating up and you think that matching them cut for cut is the way to go. The cost for this amazing appliance of yours is now a bargain basement $60.
(Shucks, that's only 40% off your innovational price. Salespeople and business owners do this every day.)
How galore units do you need to break even? 500.
Five hundred? That's five times your innovational number.
Do you actually think you can sell five times what you did before - at least without importantly
raising your overhead and your variable cost of sale?
How galore times have you done simply this in response to competitive pressures?
How galore times have you cut prices because you thought it would-be help you sell more?
:(:(:(
What we've simply done is a simplified version of what's called margin analysis, and I hope it gives you a glimmer of what can happen once
you mis-price.
For the most part, your cost cuts don't mechanically
change you to sell 66% much than you did before, and generally - at least not in this universe - you don't sell 250% more, and never, ever do you sell 500% much with this kind of cost cutting.
But there is several nice news - and it's really good.
Let's look at what happens once
you raise your prices.
Remember your high-margin product. It sells for $60 and cost $10 to make.
Through nice product positioning and first-class marketing you raise the cost to $70. That's only a 15% increase. Now you only have to sell 83 units to break even, and if you sell the same 100 units, your profits go from $0 to $1000. Good increase...
And that "hard" product - the one with $50 of costs? Raise the cost tag 20% to $120, your margins increase to $70, and now your breakeven drops 71, and you do $2000 if you sell the same number of them.
See how this works?
:):):)
You can do this same analysis in a bit much sophisticated way, considering your marketing costs, sales or affiliate commissions, travel expenses if you have them, and so on. You can see the actual evaluation effect varies quite a bit depending on these details.
If you have a high-leverage, pay-only-for-results affiliate model, a really high gross margin and about no fixed overhead, you have a lot of cost flexibility. You can cut the cost 25% and only need to sell 15% more! That's not too bad at all.
But only in that type of model. If you have a office, several staff, and a physical product - in another words, fixed overhead - lower prices can kill you - and you won't even as see it coming.
And higher prices?
They can do you rich.
By now you are starting to see the tragic effects of mis-pricing on the downside, and the wonderfully enriching possibilities of raising your prices.
This only works, of course, once
you can besides increase your value proposition...
Stay tuned for part 2.
Follow this link at the bottom of the page to get a copy of an stand out program to play with. Get the spreadsheet, plug in your own numbers. It wish actually blow your mind. Also, feel free to pass this article or the program on to your friends and associates. They wish decidedly appreciate it.(http://www.paullemberg.com/higher-part1.html)
Just simply about the author:
Paul Lemberg is the President of Quantum Growth Coaching: Much Profits and Much Life for Entrepreneurs, Guaranteed. To get your copy of our free report with elaborate steps to grow your business at least 40% faster, go to www.fastergrowthnow.com
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