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Accountants and business advisors
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Price Profit Model
When we work with our clients we always encourage them to undertake competitor analysis and profitability analysis on each of their products or services.
The price profit model is an invaluable tool in this analysis and enables you to become more courageous in your pricing decisions.
Your gross margin is a vital aspect in your profit model and is the difference between your selling price and the cost of buying in or producing your products or services. Therefore the only way to increase your gross margin is by increasing your selling price or by reducing your purchase price or production costs.
One of the largest barriers preventing businesses achieving acceptable profit levels is their reluctance to charge the right price for their goods and services.
We also use SPIN selling techniques to help clients identify the benefits of their products and services in the eyes of their customers, the reasons why the customer purchases the product or service, the uses made of the product or service in the customers' production process and the benefits of the product or service to the business.
Studies show that it is in only 15% of cases where price is the influencing factor in the purchasing decision.
Trying to hold or win market share on the basis of price discounting is the lazy man's competitive strategy. It is applicable in only one situation and that is where you have a definite cost advantage (either fixed or variable) over your competitors, and your product or service is one where customers are very price sensitive.
The price profit model shows the increase in sales that is required to compensate for a discounting policy. If your gross margin is 35% and you reduce price by 8%, you need sales volume to increase by 30% to maintain your initial profit! Rarely has such a strategy worked in the past, and it's unlikely to work in the future.
On the other hand, the next table shows the amount by which your sales would have to decline following a price increase before your gross profit is reduced below its initial level. At a 25% margin and a 8% increase in price, you could sustain a 24% reduction in sales volume before your profit is reduced to the initial level………you would have to lose 1 out of every 4 customers!
For further details please e-mail info@lamontpridmore.co.uk.
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