Seeing the bigger picture – what your prices say about you
Your business is in a bit of a tight spot. Your profit margins have dropped continually, but your services have stayed the same. How could this be? Do people just not want what your offering anymore? This could be the case, but it’s unlikely. Maybe you need more customers. Everyone knows that the more customers you have, the more profit you should make, right?
Not always. This is a common misconception that tends to catch SMEs and new business owners out. It can leave you making pretty drastic changes to your business without considering the bigger picture, which can do more bad than good.
What would you do if you were in this situation? If more customers equal more profits then surely you need to attract more customers. Perhaps you can ramp up your marketing campaigns. However, if your profit margin isn’t as high as you need it to be, this can be a costly way to attract the right clients, depending on what type of marketing you choose and the standard you are looking for. So, a better solution might be to drop prices.
Dropping your business’s prices might attract more customers, but it isn’t a guarantee. It may be counter-productive in the immediate future if you are already struggling to keep your profit margin off the ground. This strategy also overlooks some other, important factors when it comes to increasing your business profits, like service value. Of course, if you have a business partner, your relationship could become strained if you don’t agree on a strategy. You could always sell your business, but you might be reluctant to do so.
What low prices say about you
When you see two of the same products next to each other, but one is far more expensive than the other, what do you think?
a. The cheaper one must be of lower quality and have less value than the more expensive one.
b. The brand selling the item for a higher price is ripping you off, as you can get the same product elsewhere for cheaper.
When you drop your prices, you subject yourself to thought ‘a’ from your customer; it’s not particularly favourable, and it could lead to less business and hinder the rise of your profits. But if you were to increase prices to improve your earnings, you subject yourself to thought ‘b’ which also isn’t great for business. But there is another option.
c. The business selling the product for a higher price is justified because their product is better quality and is, therefore, more valuable than the lower priced one.
This is what you need to be aiming for – increasing the value of your products or services to justify a charging higher price. But to do this, you need to take a look at the bigger picture.
The bigger picture
As your business grows, it’s likely that producing your products and services to the same standard will become more expensive, and more difficult, with more overheads. For example, a small business with limited staff can only take on so many clients before human resources become stretched and service/product quality begins to suffer as a result. In this instance, how can you justify a price increase if your quality has not?
You need to think about how to increase profits and value at the same time. You could do this by reducing the number of clients/customers you have, but charging more for each one. This will be wholly justified as your staff and resources will no longer be spread thin, and you can invest more time and effort into each client or product, therefore increasing its value. Adding value to your business should be your priority if you want to increase the profit margins of your SME. Sometimes, less is more. If you feel you don’t have the time to dedicate all your attention to this issue, seek help from the professionals.
If you find that your business is suffering from low-profit margins and you need a helping hand, don’t hesitate to get in touch with Big Hand. Our accountants will look after your finances, so you have one less thing to worry about, and our advisors can show you the best ways to get back on track. Give us a call today on 0161 327 2911.