So you think a sale will boost your business
 A friend was thinking of having a 10% off everything sale. This, he reasoned, would generate interest and his increasing sales volume would make up for the reduction in his margins.
"So," said I, "you're hoping to double your sales. To make up the profit you'll lose from cutting the margins, I mean."
"No," he replied, looking a little puzzled. "I only need a ten percent increase."
"To make up the income, but not the profit. Not unless you've got suppliers to cut their price as well."
An argument followed which lasted for about five minutes until, with the aid of a diagram, the penny dropped. His margin was about 20% across his range. Reducing prices by 10% would mean cutting his margin in half. And as a result, if he wanted to maintain his profits he would have to generate twice as many sales by volume.
So, a 10 euro item cost him 8 euros to buy, generating 2 euros in profit on a 20% margin. Reducing the item to 9 euros in price would make a 1 euro profit, assuming the item cost the same 8 euros for him to buy. If he still wanted to make a 2 euro profit he would have to sell 2 items.
To be fair to him he had made the same mistake most will make when they plan sales. He'd looked at the top line, the increase in sales he needed to make to return to the same turnover. And correctly he'd worked out if he cut his prices he needed to increase sales by about that amount to lift revenues back to where they were. What he needed to do was make the next leap to see the impact on profits. That told a different story a d made the task much harder.
What he ended up doing was reviewing all his pricing. He found a few things he could cut his margins on to act as a lure for prospective customers so he could announce a genuine sale. He also picked out a few where he's increased prices to test how tolerant his customers are to price changes.
I've built him a simple spreadsheet model to help him monitor his pricing and profitability as he tests different pricing and sales models. Of course, pricing is only one part of the equation, he's improving his marketing and advertising as well.
The big lesson he's learnt, I think, is not to make big moves without testing his assumptions. If he'd gone ahead without making an almost off the cuff comment to me he might easily have wrecked his profits and maybe even his business in the process. Now he's got a couple of simple tools to help him and a better understanding of the links between price, revenue and profit.
Previously on this blog...
the global leader in Contact Center Consolidation 2.0
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A dozen beautiful images of Saturn
Wired presents a dozen of the best images from the Cassini mission
Setting up shop in a new country: beyond the website
Building a website for multiple languages is not just about translation. It is a critical business decision that has to be taken carefully.
Why call centre staff deserve your respect
If call centre staff set the first impression for your business, why do we treat them so badly?
Becoming a Specialist? A hard decision to make ...
Specialising requires hard strategic decisions to be made about your business.
When good people move on
Losing a member of staff to another company is not necessarily a bad thing
The quest for quality in Agile Software Development
Why quality assurance remains a central part of project management, regardless of the use of Agile methods
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