Too often we see the relationship between profit and price without also understanding their relationship with sales, and more importantly The Customer.

Ultimately your customer is not interested in how much profit you are making, and as such, the customer is only interested in what they are interested in.  Which could be many things, but doesn’t include your businesses success or failure.

Your job as a retailer, is to understand your customers’ needs and sell to those needs, and to understand retail trends and shopping habits. If you do this, you see an increase in shopping occasions and in return, an increase in sales. Price, availability and service are triggers to a sale and not a function of profit. If you can drive more customer shopping occasions, you can drive more sales; which in turn can lead to more profit and better economies of scale.

This doesn’t mean that you ignore profitability. Rather, understand that if you see more sales, then profit will come as a result.

It is also important that you look at Profit in the right way. Often I hear people wanting to increase their percentage profit; “I think we can make an extra 2% GP on this product”.  This may well be the case, however what is the impact on sales?

Perhaps a more effective method is to look at dollar profit instead of percentage profit. Dollar Profit can relate to sales volumes in a much more meaningful way. I am reminded of another old school retailing term from those early days, “you don’t bank percentages”.

Understanding how price elastic a product is, will help you to understand if changing price on a product will positively or negatively affect your dollar margin (my economics teacher would be so proud).

Coming back to the retailer that is struggling with their profit percentage. My advice to them is, to understand the impact of increasing price. What would happen to customer foot traffic, basket sizes, and transaction sizes, sales and profit dollars if they increase price?

Would you rather make 50c once or 20c three times? Yes I know… Old School!

Price competitiveness in their scenario, as well as some good, simple marketing execution could be just what they need to turn their profit around.

What do you need to do to increase profit in your business?

Contact us today to talk about how we can help your business grow.