Test your understanding of what drives business profits with this quick quiz…
How much will net income rise if prices are increased 1%?
Studies completed by both Harvard University and McKinsey Consultant show that a 1% increase in a company’s prices will result in an increase in its net income of at least 11% and frequently by as much as 20%.
What percentage of currently existing businesses will still be around in ten years?
Studies completed by the U.S. Dept. of Commerce, Michael Gerber, author of the E Myth and Dr. Lawrence Steinmetz, author of How to Sell at Prices Higher Than Your Competitors all show that only about 5% of businesses last beyond ten years with the majority failing in the their first two to three years.
Most companies subsidize at least what percent of their customers?
From 15% to 40% of your customers are money losers for you, costing you cash out-of-pocket every time you sell to them. Identifying and eliminating these upside down transaction will significantly increase your company’s net income, oftentimes doubling it. Study after study, including those conducted by prestigious institutions such as Harvard Business School and top-flight consulting firms such as Bain have proven this conclusively. Others have shown that up to 140% of a company’s profit comes from as little as 15% percent of its customers. Yes, your profitable customers – and ultimately YOU – are subsidizing the rest
What percent of price complaints aren’t really about price?
The vast majority of price complaints are really a disguised way for a prospect to say no without providing the true reason for why they’re not buying. Keep digging to find the real reason for their reluctance, solve it, and almost always, book the sale. One thing to remember is that unhappy customers create price complaints. Service complaints are a different matter and need to be assuaged immediately.
What percent of companies misprice their products and services?
A recent study completed the Customer Manufacturing Group determined that at least 96% of companies misprice their products and services. Other studies have found similar results. Of the total, 92% undercharge and 4% overcharge. Nearly every business can significantly improve its bottom line by learning how to price more effectively.
How much profit is lost by companies that use cost based pricing to set their prices?
Companies that charge by the hour for their work invariably leave a significant portion of their profit on the table; often as much as 50%. In his seminal book Professional’s Guide to Value Pricing, Ron Baker demonstrates the power of fixed price billing. Customers will almost always choose to pay a higher fixed price than deal with the uncertainty of hourly billing.
A 5% reduction in customer turnover will increase net income by a minimum of how much?
According to a study completed by M/S Database Marketing, creating an environment where customers are valued and well served stay customers longer. Longevity is vital because long term customers buy more and pay more while costing less to serve. The net effect is that net income will be increased by a minimum of 25%, oftentimes even higher. Unfortunately, most companies don’t develop and fund a program for increasing customer retention.
A $1 increase in profit will increase your company’s market value by how much?
The market value of a business is the total of the capitalization of its expected cash flow, the market value of its equipment, and goodwill. In today’s world, market capitalization rates tend to result in a $3 market value increase for every $1 of increased net income. Goodwill typically represents between 60% - 80% of a company’s market value. However, take note, there will be no goodwill unless the company has a management team in place that can operate the company without the involvement of the owner. Buyers are looking for an investment, not a job.
What percent of business buyers use price as their primary factor in choosing a supplier?
Only about 16% of business buyers use price as a major, if not the major consideration when buying products and services for their companies. Imagine what would happen if, due to a low quality part, a production line were to be shut down for an extended period of time or was the underlying cause of a massive recall? Seasoned purchasing agents buy acceptable quality, not low price. It’s only the rookies who focus on low price.
What percent of retail buyers use price as their primary factor in choosing whom to buy from?
Few people focus on low price – they look for bargains. If price were the number one consideration when buying there would only be run-down used cars on the road, clothes would only be bought at the thrift store, and people would eat a lot of steamed rice. Only about 24% of people focus on low price and even then, they only focus on low price for certain items – not everything they buy.
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Here are some articles that are great introductory reads to get you started…
- The Four Profit Elements and How They Drive Your Bottom-Line
- The Hidden Benefits of Repeat Business
- Stop Paying Your Unprofitable Customers To Keep Coming Back
- The Devil (and the Profit) is in the Details
The Automotive Center Case Study
Contact Chuck to discuss your options for improving your company’s performance.