Focus On Increasing Profits, Not Price
Our Managing Director, Louis Tanguay, recently wrote an article for the California Business Journal about how to increase your business by 30% or more. Here’s a link to that original article.
Below, we’re written a little lead-in explanation, and an additional tip for you which expands on the initial concept Jay Abraham created.
Marketing guru Jay Abraham is well written and an accomplished businessman, marketer, and public speaker. He’s helped turn around numerous companies and launch others. His teachings have helped many businesses from the one person office all the way up to Fortune 500 companies. Learn more about him here.
Mr. Abraham created a formula to help people understand how to increase their business 10%, 20%, or over 30%. The idea behind the formula is that there are only 3 ways to grow your business. Get more customers, increase price, or increase the purchasing frequency of existing customers (ie get them to buy again and again and more often). Anything you do to grow your business will fall into one of these categories.
Louis Tanguay runs through this formula, and expands on it by giving some tips on how to actually make that growth happen. You can read that article here, as mentioned above.
Here’s the bonus tip: Adapting the second category “Raise the Price,” to a more accurate term, “Increase Profit Margins,” helps us truly understand the power of this formula. We looked at the original idea, and while nearly perfect, we saw that we can get the same value from this category of price, and make it more efficient.
Jay was mostly concerned about marketing, not so much about business efficiency, so his formula is still very accurate. Louis, however, likes to look at both sides of the fence for our customers. By looking to increase profit margins, you can create a more efficient and streamlined business.
Example: Let’s say you sell product which cost you $40 each, and you sell them for $100 each. You have a margin of $60, which is also 60% in this example. If you increase the price 10%, as Jay suggests, you will have a product which costs you $40, and you sell them for $110, increasing your profit to $70, but your product is also more expensive now. You have 63.6% profit margin, which is still great…and more margin! HOWEVER…there are two ways to increase your profit margin. The other way is by lowering your costs. This is key.
New Example: Now we have a product which costs us $30 after working a few negotiations, using leverage on suppliers, cutting waste, etc, and we keep the price the same at $100. Now, we have that same 10% profit margin increase and same $70 margin, however, now we have 70% profit margin, as well as a cheaper cost for the product and most likely a more efficient and more streamlined supply chain…and the customer doesn’t have to pay more for the product which keeps them happy and you potentially won’t lose any sales due to a price increase.
So, please do use Jay Abraham‘s formula, and please read Louis’ article on how to actually get an increase in those categories, but also remember there is another option for the middle category there, and that’s to focus on the margin increase and not so much the price increase.
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