Should We Cut Costs or Raise Prices?
In this issue…
The easiest way to make more money
397 words, total reading time about 2 minutes
Strong revenues can cover a lot of financial ills in a company. But as revenue growth becomes less certain, good managers become wary. There is little comfort in watching revenues decline as your costs remain constant.
We see two common reactions to this. The first is the natural urging of the sales team to “sell more”. This is, after all, the #1 strategy most companies employ in their pursuit of greater profitability. In tough times, though, the urging can morph to “sell more even if you have to take a bit less”. Under pressure, companies tend to become more aggressive with their pricing. Discounting becomes a habit.
The “sell more” strategy doesn’t always work. Despite aggressive pricing, sales stagnate or even decline. At which point managers go to their fallback option of looking for ways to cut costs.
Now, we are the first to implore mangers to keep their costs in line with revenues. If there are excess costs, get rid of them. If there are employees with sub-standard skills or undisciplined behavior or who just don’t fit the team… Get rid of them, too. But these are “easy” fixes that good companies have already taken. At which point cost-cutting becomes painful, and even de-moralizing.
We have always held up a third strategy as the best strategy for improving profits. Two words: Charge. More. This may seem counter-intuitive at a time when sales are declining, but no other strategy we know lifts sales & profits faster than raising prices.
The impact can be extraordinary. Raise your project pricing by 2 points and guess what? Your clients won’t even notice and your profits will increase by 2 points. If you were making an 8% net profit to begin with, the 2 points would represent a 25% profit increase. Try doing that with cost-cutting!
Raising prices increases sales by the amount of the price increase. Discounting has the opposite effect. It reduces revenues and profit by the amount of the discount.
Of course, raising prices too much could make you less competitive and you might lose a few deals. This is what your salespeople will tell you. But we would tell them, “You’re a salesperson, right. Go sell. You can close the deal for 2-4% more.”
Because that’s what happens. The salespeople pushback, and then they get it sold anyway.