How to improve your profits.

This week I have been inspired by Robert Craven of The Directors Centre who I had the pleasure of hearing at a Barclays bank business seminar.

Robert posed the question of how can you improve your profit margins? Do you A) raise your profits, B) cut your profits or C) cut your supplier costs. I still find it strange that most people still beleive that by cutting your prices you’ll become more profitable, especially when you consider the following.

If you raise your prices by 10%, you reach the same profit margin in 75% of the time. However, if you cut your prices by 10% you have to work up to 30% more or an average 2.5 days longer just to reach the same profit margin.

The question is then always asked “But some of my clients wont buy from me if I put my prices up” You know what that person is generally right, but what he/she neglects to take in to consideration is that the customer that quibbles is usually one of the bottom performing customers. You know the type, they do you a great favour by placing an order with you but are never happy with the colour, design, layout etc and then take the longest to pay their invoice.
What Robert didn’t explain was how to raise your prices without upsetting your customers hopefully I will now rectify that.

What you have to do is firstly decide on how much of a price rise you need or want, remember the old adage cheap is not always best. Let’s say you decide to put your prices up by an average 10% you also recognise that some of your better performing clients won’t be happy. In which case you should have a two or three tier price structure for good customers and one for new customers or the bottom performing customers.

The next decision to make is when will the prices go up, let’s say for the purpose of this blog you opt for Aug 1st. Once decided take a long and honest look at your customer base and split them in to two categories. The first should contain those customers that pay you on or before the due date or where you have agreed special terms etc. The second group, which you will find is generally the largest and will contain all the customers that pay late, who make unreasonable demands or who are in your mind “Scum”.

You should send the 1st group an email explaining that while you have had to put up your prices by an average15% from August 1st you have decided that because you value their business and settle their invoices within the agreed terms you will hold the price rise to 10%. History shows that the majority will accept the price rise and for those that question it, you can always negotiate “more” favourable settlement terms.

For the second group send them an email explaining that due to circumstances beyond your control as of Aug 1st your prices for those wanting 30 days credit prices will raise by 15%. However for those who settle their accounts within 14 days of delivery the price rise will be 12%. For those who are prepared to pay on receipt of your invoice the prices will only rise by 10%. You’ll be amazed by the number that will agree to pay early.

The upside in adopting this strategy is by and large you will only loose the customers from the bottom of the pile and those that are left will be on average paying between 5 & 10% more. Another by product of this strategy is that your accountant will have more respect for you because you would have improved your profit margin during a recession.

To find out about David and the work of Deanem Collections Ltd, please visit our website: www.deanemcollections.co.uk.