As accountants in Stoke-on-Trent, we aim to help our client’s businesses to grow.
When clients are looking to grow their businesses, there’s often a temptation to cut prices to drive up sales. Whilst this can sometimes be the right thing to do, it needs to be done with caution. Often the reduction in price DOES increase sales, but sadly the gross profit actually made DOESN’T. This is because of the interaction between volume and the gross profit percentage – something business owners don’t always fully understand.
So for that reason, we like using our Profit Wizard table with clients which is reproduced here for you. It’s a great way of showing how much volumes need to increase, to simply have the same gross profit as they had before discounting.
As you can see from the table, if a business has a current gross profit percentage of 40% and decides to cut its prices by 10%, it needs to increase volumes by 33% just to stand still. Above 33% and it’s worthwhile, but this is a huge increase in volume, which will inevitably drive other costs upwards.
Rarely do these strategies work across the board, but sometimes it can be worth doing on a few product lines to drive other non-discounted sales upwards. The key here is to test it and measure the results very carefully, and if in doubt don’t do it!
By all means please do get in touch if you’d like to talk to one of our team.