I am constantly amazed how some business owners fail to prioritise making money…
After all, that is the ultimate purpose of a business (whether you want to dress it up with ‘to provide for your family’ or ‘to provide employment to others’ or whatever else) – the ultimate purpose of EVERY business is to provide value to customers and be financially rewarded for it.
So why do so many business owners priorities non-money making tasks?
I thought about this after receiving a response from a customer recently;
One of our clients is in the technology service space, and we have helped them craft an email recently explaining that due to some costs increasing they would have to increase their prices by 5% in the near future.
We helped them craft a really great email explaining that they hadn’t increased their prices in some time, but due to circumstances beyond their control, they needed to pass on this small increase (which amounted to less than £5 per month for the average customer and no more than £8.50 to ALL customers).
However, they received back an email saying:
“I am very surprised that you are passing on your increased cost of doing business to those of us running small businesses who are also facing the challenges of managing inflation, cost of living, workplace pensions and GDPR compliance.”
We were both a little shocked, to say the least.
Does this mean that they are absorbing any increasing business costs to the detriment of their own profit and finances? How long can any business keep doing that and maintain a high level of service?
How long can you squeeze your margins without it impacting heavily?…
I recently had a PRICE versus VALUE conversation with two other new(ish) clients, and was shocked to hear familiar stories!
One new client admitted that they hadn’t put their prices up for some of their longest standing clients in nearly four years! AND offered them both an EARLY SETTLEMENT discount AND sent them ‘SPECIAL OFFERS’ with up to 20% OFF their current prices (if they booked ‘packages’ at any one time!)
Are you serious?…
In December 2017, The government admitted households are feeling the pain from rising inflation after the cost of living rose to a near six-year high of 3.1% in November.
To put that in REAL terms:
- The average family food shop has risen by 4.1% in the past 12 months
- Transport costs have risen by 4.5% in the same period
- and clothing and footwear has risen by a little over 3%
If your profit margin was say 30%, based on the current TRUE RATE OF INFLATION you would need to increase sales by 15% just to stay still if your now DISCOUNTING existing clients by not charging them at least the true cost YOU are incurring to remain in business and able to provide ANY product/service!
The final example in this blog is of another recent enquiry we received from another prospective client, that has been running their product based business, by buying in parts, assembling them and then selling it as a finished product by simply adding 30% to the invoice received for the parts they had purchased!
We went through what I thought was a rather simple exercise of looking at Fixed and Variable Costs! (Fixed costs often include rent, buildings, machinery, etc. Variable costs are costs that vary with output and tend to include wages, utilities, materials used in production, etc) After working through their FIXED and VARIABLE Costs, we worked out for the past 21 months (since he had started trading) they had been selling their most popular product…at a loss of £4.07 per sale!
I highly suggest you increase your prices ASAP and not fall into this trap. Every year inflation means the money you charge is worthless. And with the current cost of employing and compliance increasing, you will be earning less if you don’t compensate for your revenue model.
It just makes GOOD business sense 🙂
Drop me an email if you’d like to receive a copy of our Profit/Loss spreadsheet showing you HOW INCREASING and DECREASING your prices ACTUALLY affect the profitability of your business!