Graham McGregor: Two ways to grow profits

9:30 AM Tuesday Apr 24, 2012

Jamie Tulloch from E3 Business Accountants made an interesting comment in his business and tax tips newsletter recently.

Jamie said it is a social responsibility for every company director to make a healthy profit. Without someone making a profit, not one dollar of tax would ever reach the government. The more profit you make, the more tax you pay and the greater likelihood that you will remain in business. (So healthy profits are good for everyone.)

Here are two ways you can grow your profits:

1: Put up some (or even all) of your prices by at least 5 per cent every six months. This is a 10 per cent increase in prices every year and is a useful way to recoup many of the extra costs you now have to pay in your business.

Most business people will resist this idea like crazy. They will say things like "My customers will all leave and go somewhere else."

This is rarely true.

The freight company that increased prices by 10 per cent:

A person took over as CEO of a large freight company that was barely breaking even each month. This was despite an excellent reputation and a multimillion dollar turnover. The new CEO decided that the best way to turn around the freight company was to increase the prices on all freight services by 10 per cent overnight.

The entire management team and sales staff in the freight company told the CEO this would have a disastrous impact on customers and many would leave. The reality was that only three freight customers out of nearly 3,000 complained about the increase in freight prices. And only one of these customers took their business to a competitor. Yet after this 10 per cent price increase the freight company now started to make a very healthy profit of well over a million dollars a year.

2: Give your clients several different price options. This is a great way to increase profits. The basic idea is you give your customers three different price choices.

Say to your customers something like this:

"We have several different options on this particular product or service. The premium option includes A, B, C and D. This is more expensive than the regular product or service but it's very popular with our clients who value X, Y and Z.

The premium option is $X. Then we have the regular option which includes A & B. Over half our customers take the regular package. It's available for only $Y. And for those clients who have a bit of a tight budget we also have the basic option which includes A. This is useful for clients who need to be careful with their money at the moment. The basic option is only $Z. Which option is of most interest?

Now you can create a premium, regular and basic option for virtually any product or service.

The premium package might include guaranteed delivery or service within 24 hours, or a double length guarantee, or any number of other added value items that a client would appreciate.

The basic version might not include things like ongoing technical support.

When you give clients a couple of pricing options guess what will happen?

That's right. Some will choose the premium option because there are always a number of clients that want the best that is available. Many will still take your regular option and some will also take your economy option.

But what you haven't had to do is discount your prices and throw away some of your hard earned profits.

Action Steps:

Look at the products and services you sell. Put up the prices on some of these by at least 5 per cent this week. Create three different pricing options for one of your popular products or services

"A large income is the best recipe for happiness I have ever heard of."
Jane Austen 1775-1817 British Novelist