Profitable Pricing

This is part of an article that first appeared in the American Drycleaner magazine with the title of Profitable Pricing.

If you have ever wondered how much your business must increase in order to stay on an even keel after cutting prices, please let me share this with you.  The figures come from the Eastman Kodak Research Department several ago and are still valid today.

Assuming an anticipated profit of 25% on selling price, a 2% cut in that selling price means you must increase your volume of sales by 8.7% to make the same profit as before the price was lowered.

A 3% cut means a 13.6% increase in sales is necessary to make the same profit as before the cut.
A 5% cut means a 25% increase in sales is necessary to make the same profit as before the cut.
A 7.5% cut means a 47.8% increase in sales is necessary to make the same profit as before the cut.
A 10% cut means a 67% increase in sales is necessary to make the same profit as before the cut.
A 20% cut means a 400% increase in sales is necessary to make the same profit as before the cut.

TO REVERSE THIS PROCESS

A 3% increase in prices means the same profit on 90% of sales volume.
A 5% increase in prices means the same profit on 83.5% of sales volume.
A 7.5% increase in prices means the same profit on 77% of sales volume
A 10% increase in prices means the same profit on 71.5% of sales volume
A 15% increase in prices means the same profit on 62.5% of sales volume
A 20% increase in prices means the same profit on 55.5% of sales volume.

There are two different ways of looking at the above figures.  The first is if you lower your prices there is a need for more volume to sustain the same amount of profit.  Increased volume results in higher variable costs such as utilities, supplies, insurance, taxes and labor.  This means you are doing more volume, at less revenue, with higher expenses.

With an increase in prices there is less need for volume to maintain the same revenue level.  A 10% increase in prices means that you could lose 29.5% of your customers and still maintain the same profit level.

This is a graphic way of looking at what lowering your prices will do to your total profit structure.  There are always going to be reasons for lowering prices such as employees or equipment not working to capacity; to gain immediate business; to keep up with the competition; anniversary specials or many other reasons.

Remember that your long range outlook should be to manage a thriving and profitable business and normally lowering prices is usually not a good marketing plan.  Enhancing your technical and  professional reputation is always a good bet !