Walker Wayland - Perth Accountants

Aug 2019 3 Minutes

Why Pricing is the Key to Growing Your Profit Margins

When did you last increase your prices? If you're like many business owners you might say it's been quite a long time since you did that. Rarely do our clients receive push back from customers when they increase their prices. Usually, the customers who leave because of a price increase are the customers you want to lose in the first place.

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Pricing is the key to your profit margins, so let's begin by defining what profit margins are. There are two important numbers for business owners to know.

Gross Profit Margin

Your gross profit margin, otherwise known as gross profit percentage, is calculated by your sales and deducting your direct costs. Direct costs are usually labor and materials - the costs in producing what you sell. This leaves you with your gross profits. Divide that number into the sales for your gross profit percentage.

Sales - Direct Costs = Gross Profit
Gross Profit / Sales = % Gross Profit Percentage

 

Net Profit Performance

The other important key performance indicator is your net profit percentage. Start with your gross profit which we just calculated and deduct all of the other expenses in your business to give you your net profit. Then take your net profit and divide that into your sales to give you your net profit percentage.

Gross Profit - Expenses = Net Profit
Net Profit / Sales = % Net Profit Percentage

 

Now that we understand the terminology, let's consider a big impact on your pricing.

 

Discounts

An important component of pricing is how much you give away every time you make a sale, otherwise known as discounts. Discounting is not covered by a strong policy in many businesses and salespeople can give away too much in order to close a sale. An additional 5% of discounts given away on top of your normal policy can make a big difference to your profit.

Do this simple calculation. Take the total sales in your business again and divide that number by 100. Now every time you can improve your gross profit percentage by just 1%, the resulting number will drop straight to the bottom line.

Sales / 100 = Gross Profit
Gross Profit / Sales = % Gross Profit Percentage

 

Imagine your sales are $1 million. Divided by 100 gives you $10,000 in gross profit. Every 1% increase in your gross profit percentage will drop $1,000 to your bottom line to boost your profit.

$1 million Sales / 100 = $10,000 Gross Profit
$10,000 Gross Profit / $1 million Sales = 1% Gross Profit Percentage

 

That's more money you can take out of your business, and that's worth doing something about. Because of our strength in numbers Walker Wayland can help you in this area of pricing.

We look at each of your products and the profit margins you're achieving on each one. We also look at your discounting policy and make sure you're not losing sales revenue as a result of people abusing those policies. We also look at your results against industry benchmarks and provide recommendations to help you improve your profit margins.

Let’s have a conversation if a look at your pricing and discount policies would benefit you. We would love to discuss how we can help improve your profit margins.