| I know at first glance this sounds obvious, but it | | | | How many times have you done just this in |
| may be worth it for you to think about your | | | | response to competitive pressures? |
| prices. At least just for a moment. | | | | How many times have you cut prices because |
| How did you decide on your current pricing? Did | | | | you thought it would help you sell more? |
| you conduct market research to understand what | | | | :(:(:( |
| prospects would pay? Or did you compare | | | | What we've just done is a simplified version of |
| yourself to your competitors and base your price | | | | what's called margin analysis, and I hope it gives |
| on that? Or was it a crapshoot, and random shot | | | | you a glimmer of what can happen when you |
| in the dark? | | | | mis-price. |
| These are the ways most people do it, and they | | | | For the most part, your price cuts don't |
| are all wrong. Because the price you set for your | | | | automatically enable you to sell 66% more than |
| products and services is more important than you | | | | you did before, and generally - at least not in this |
| think. | | | | universe - you don't sell 250% more, and never, |
| The following few paragraphs are a bit number | | | | ever do you sell 500% more with this kind of |
| heavy, but stay with me because this will be | | | | price cutting. |
| really valuable for you to understand. | | | | But there is some good news - and it's very |
| Let's say you sell a high margin product - | | | | good. |
| information products and software are two good | | | | Let's look at what happens when you raise your |
| examples. Your price is $60, and your costs are | | | | prices. |
| $10 - that means your gross margin (selling price - | | | | Remember your high-margin product. It sells for |
| your costs) is $50 each time you sell one unit. | | | | $60 and costs $10 to make. |
| Let's say further that your overhead is $5,000 | | | | Through good product positioning and excellent |
| per month. If you sell 100 units you'll break even, | | | | marketing you raise the price to $70. That's only |
| right? | | | | a 15% increase. Now you only have to sell 83 |
| Now you want to sell more, and decide you can | | | | units to break even, and if you sell the same 100 |
| take some business from a competitor by | | | | units, your profits go from $0 to $1000. Nice |
| lowering your price - temporarily. You lower it to | | | | increase... |
| $40 - a 33% price cut, and not uncommon. | | | | And that "hard" product - the one with $50 of |
| Your costs remain $10 and your overhead is still | | | | costs? Raise the price tag 20% to $120, your |
| $5,000, only now your gross margin is $30 - 60% | | | | margins increase to $70, and now your |
| of what it was before. And how many units do | | | | breakeven drops 71, and you make $2000 if you |
| you need to break even now? 166! That's 66% | | | | sell the same number of them. |
| more unit sales required to make up for the 33% | | | | See how this works? |
| price cut! | | | | :):):) |
| But what if you're feeling very aggressive and | | | | You can do this same analysis in a bit more |
| you cut your price in half (also not unheard of) to | | | | sophisticated way, considering your marketing |
| $30. Now you have to sell 250 units - just to | | | | costs, sales or affiliate commissions, travel |
| break even! That's 2-1/2 times as many as | | | | expenses if you have them, and so on. You can |
| before. How easy do you think that's going to be? | | | | see the actual pricing effect varies quite a bit |
| Let's use a different example - something that | | | | depending on these details. |
| has real manufacturing costs. This time, your | | | | If you have a high-leverage, pay-only-for-results |
| product sells for $100, and your cost of goods | | | | affiliate model, a very high gross margin and |
| are $50 per unit, for a gross profit of $50. Same | | | | almost no fixed overhead, you have a lot of price |
| $5000 overhead, same number of units to break | | | | flexibility. You can cut the price 25% and only |
| even. Now imagine you cut your price 20%, to | | | | need to sell 15% more! That's not too bad at all. |
| $80, leaving you with $30 of gross margin. You | | | | But only in that type of model. If you have a |
| need to sell 66% more units. Ouch! | | | | office, some staff, and a physical product - in |
| What if you cut the price to $70. This 30% price | | | | other words, fixed overhead - lower prices can kill |
| cut means you have to sell 2-1/2 times more | | | | you - and you won't even see it coming. |
| units - just to stay even. | | | | And higher prices? |
| Let's go further... | | | | They can make you rich. |
| Competition is really heating up and you think that | | | | By now you are starting to see the tragic effects |
| matching them cut for cut is the way to go. The | | | | of mis-pricing on the downside, and the |
| price for this amazing widget of yours is now a | | | | marvelously enriching possibilities of raising your |
| bargain basement $60. | | | | prices. |
| (Shucks, that's only 40% off your original price. | | | | This only works, of course, when you can also |
| Salespeople and business owners do this every | | | | increase your value proposition... |
| day.) | | | | Stay tuned for part 2. |
| How many units do you need to break even? | | | | Follow this link at the bottom of the page to get |
| 500. | | | | a copy of an excel spreadsheet to play with. Get |
| Five hundred? That's five times your original | | | | the spreadsheet, plug in your own numbers. It will |
| number. | | | | really blow your mind. Also, feel free to pass this |
| Do you really think you can sell five times what | | | | article or the spreadsheet on to your friends and |
| you did before - at least without significantly | | | | associates. They will definitely appreciate it.( |
| raising your overhead and your variable cost of | | | | (c) Copyright Paul Lemberg. |
| sale? | | | | |