Cutting prices to spur business may not be the best approach.
For those of you contemplating beginning the new year with a cut in prices in order to remain “competitive,” consider first how costly such a move may actually be to your bottom line. In fact, the following discussion and formula just may force you to reconsider.
Assume that your company has a 40 percent gross profit margin. Now, if prices are decreased 15 percent, a 36 percent increase in sales dollar volume in necessary to maintain the same gross profit. In terms of product sold, there has to be a 60 percent increase in the unit traffic in order to maintain the same gross profit dollar amount.
The formula: For the sake of simplicity, assume that an item or service sells for $100, and that 10 units are normally sold. That gives a $1000 gross sales volume. The gross profit is $40 per unit, or $400. If the price is dropped 15 percent to $85 an item, the new gross profit ($400) by $25, we see that 16 units have to be sold to still earn a $400 gross profit. Sixteen units at $85 is $1360. This 60 percent increase in units and 36 percent increase in dollar volume are arrived at.
Consider now if prices are raised by 15 percent, then a 17 percent drop in sales dollars can be tolerated along with a 28 percent decrease in units. If the price is increased 15 percent, the gross profit becomes $55 per unit (instead of $40). At 55 percent gross profit, only 7.2 units (instead of 10) have to be sold to maintain the same $400 gross profit.
The moral of this story: Always consider if sales in units can be increased as much as they have to be to yield a gross profit dollar amount.
By dropping your prices without serious consideration, you may just end up giving away the competitive edge you were striving to achieve.
I would appreciate it if you would publish this in your magazine.
I, as an exhibitor in the recent Holiday Nail Extravaganza, in Buena Park, California, would like to take this opportunity to give a personal thanks to Ric Munoz for a show well done!
It was a beautiful show and I know we all appreciated the professional, personal touches that Ric showed us, his exhibitors.
Ric has a bottle of champagne in a bucket of ice with glasses waiting at each exhibitors booth. Each of the contestants received a long stem rose, bottle of champagne, nail corrector and a certificate of appreciation. Everyone who helped run the show were dressed very well and were very helpful, cheerful and professional in manner.
What a blessing after all the shows I have worked, to have a show like this. The personal touch that Ric showed us all really made the difference for all the hard work we ALL, as exhibitors, put in to doing these shows.
Welcome back Ric, glad your show is back and maybe some of the other show promoters can learn from your show.
Janay’s Miracle Nails, Inc.
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We have been trying this new procedure, but we are having very little luck with it. Sally informed me that your magazine had a very good article on this procedure.
Would you please send that issue to our address and start our subscription to your magazine. I really appreciate your taking the time to do this.
Grand Rapids, Michigan