Archive for March, 2012

Profit Margins: Pricing and Costs

March 22, 2012

 I mean no disrespect to anyone, including myself, who starts a business, and expects to make money, in great abundance and quickly.

This may happen in sites like large Malls or Broadway and 42nd Street in New York, but in the vast majority of cases, it takes a lot of hard work, time, and flexibility.

So if the problem you are researching is really a location issue, look to Improve Your Profits.  Location is not a profitability issue, unless you are paying more than the traffic is worth at a mall, for example.

Margins are: Price – Direct Costs = Margin.  They come with many names.  I’ll just stick with this definition.  Direct costs are your product costs, the classical Cost of Goods Sold.  Right now forget about labor, rent and other stuff, even if you know what the unit cost is.  Just accept my definition.

The most important part of this equation is Price.  If your margins are not getting you what you want in life, and thus making your business life less fun, you should start with price.  You need to know, for a fact, certain, what your competitors are charging.  No guessing.  I could get very fancy here and talk strategy, quality, service and product plans, but I will not.  Just price.

You have little control over costs.  They are market driven.  You may save a dollar here or there by changing, for a time, your coffee supplier, for example, but this is not going to solve a margin problem.

What will solve your profit margin problem is raising your price.  Obvious right.  Takes courage to do this.  I’ve learned the hard way that sudden, unannounced price increases really get customers angry.  This is not good.  In fact, it is very bad.  So decide, but give everyone fair warning.  Then raise them.  Why?  Too Simple, you say.

The reason is indeed simple.  Price increases, the amount of the increase, goes directly to profits.

And, without trying to pollute your mind or your store, take down all those negative ads; you know the ones.  Bathroom for my friends only, not you, outsider.

Never, never give up.  There is an answer.  Generally, always say ‘sure, I can do that”.  If you lay a foundation of always giving, you will get, and make the price increase stick.  And like this person, think.