How Pricing Can Advance Your Profits

Frequent Updates To Your Pricing Models Will Ensure Your Making The Most Bang For Your Buck

Want to dramatically increase your profits this year?

There are a lot of different ways to make this happen.

Luckily, there’s one low effort option that most businesses overlook.

Many Businesses Simply Forget To Increase Prices

I want you to ask yourself this question: “When was the last time I increased prices?”

For most businesses, the answer to that question ranges somewhere between “never” and “I can’t remember the last time we did that.”

As entrepreneurs, we tend to get caught up in the “whirlwind” of running our business, creating new offers and optimizing our businesses, but we rarely think about pricing.

When we buy businesses, we frequently find “hidden gold” hiding in their current prices, which often have not been adjusted in several years.

In fact, for most businesses, a price increase of 5% to 9% every couple of years won’t have any significant impact on customer demand and purchases.

This is because of a little thing called price elasticity of demand.

Understanding the Price Elasticity Of Demand

Price elasticity of demand is an economic term.

Expressed mathematically, it looks like this:

Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price

But the simple way to grasp the concept is to think “how much, if at all, will sales go up or down if we raise or lower prices, respectively”

If price increases have no impact on sales, then the product is said to be “inelastic.”

However, if an increase in prices causes sales to decrease or a reduction in prices causes sales to increase, then the market for that product is said to be “elastic.”

You will never know if your market is elastic or inelastic unless you run price tests from time to time.

Running Price Tests

So, run a price test on all of your current products and services and be sure that you are…

  • keeping up with inflation, and
  • getting the most appropriate price for the value you provide to your customers.

The results and the math may surprise you.

For example, in one of my businesses, we ran a 12-way split test on increasing pricing for 4 of our products.

For each of the products we tested prices in several increments across each product.

Here’s where we ended up:

  • Product #1: Original price = $150. Winning price = $179 (19.3% increase)
  • Product #2: Original price = $150. Winning price = $159 (6% increase)
  • Product #3: Original price = $125. Winning price $129 (3.2% increase)
  • Product #4: Original price = $150. Winning price = $150 (0% increase)

Based on the annual run rate of customers and sales for each of these products, revenue will increase by 19.3%, 6%, 3.2% and 0%, respectively, as a result of implementing the new pricing.

Conducting this pricing test costed us about a $25k shortfall against expected January revenue for these products because some price tests over-performed and some under-performed against the control price (the one we have charged for the past couple of years).

However, the weighted average increases expected across all 4 products ends up at ~ 9.13%.

Now, here’s where it gets exciting…

Price Increases Frequently Mean Dramatic Increases In Profits

As cool as a 9.13% increase in REVENUE is, the direct increase in PROFITS is substantially greater.

Remember, there is $0 additional cost associated with this additional revenue, because all we did was raise prices.

There are no additional customer acquisition or cost-of-goods-sold costs associated with the price increases, just higher prices for the same things we sold before the increase.

The costs stay the same, and the profits skyrocket.  

In fact, the extra projected profit for these 4 products equates to a 54.8% increase in profits for year over year. That’s money we would have missed out had we not run these price tests.

These products generate millions of dollars in revenue for us, so this is a significant bump in what we will receive in distributions from their sales this year.

How much of a bump? Let’s do some more math.

Our margin in this particular business is about 41.6%. Meaning that for every million dollars in gross sales, we make about $416,000 in profit.

An increase in profits of 54.8% resulting from these price tests, means an extra 22.8% in take home for us for each $1 million in sales. That means for every $1 million in gross sales in this business, we get another $228,000 for free.

No additional costs.

No additional effort.

Just free money.

All because we ran those price tests.

How would an extra 54.8% raise this year over what you took home from your business last year affect your lifestyle?

Now, go run some price tests on your products and services today and let me know the results as they come in. You can thank me later. 🙂

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