Profit is not a dirty word …Price pressure can be subtle or blatant, mild or severe. Whatever its form, it’s an integral part of business.
JAMES RHODES, former Ohio governor
It's easier to recognize when it comes from the customer or the marketplace. It’s tougher to recognize but equally damaging when it's internal and the wounds are self-inflicted.
In a recent discussion on price pressure, a client observed that salespeople often try to offset cost increases by adjusting the sales price at a straight dollar-for-dollar ratio. It looks good on the surface, but when you do the math, it’s a defacto reduction in profit margins.
He shared this example:
Old Cost: $80 Price: $100 Profit: $20 Margin: 20%It’s clear that in spite of the price increase, the profit margin has been reduced by 2%. Multiply that small cut over multiple products, services and salespeople, and you significantly affect overall profitability.
New Cost: $90 Price: $110 Profit: $20 Margin: 18%
What used to be $1 million in profit is now $980,000. For a $5 million company, that little difference translates into $100,000 in lost revenue.
Extend these small cuts across multiple quarters or years, and the impact is even greater. As business people, we know this. But sometimes we need a simple, clear reminder.
Profit is not a dirty word.
Profit is in fact essential, if we plan to be in business next year and the year after that. It’s discretionary revenue to spend, save or invest. It’s the critical thing that covers day-to-day operations. In good times, it funds wage increases, supports job growth and encourages innovation and expansion. In tough times, it’s the reserve that may help keep the doors open.
When carried to the extreme, sacrificing profit today creates a dangerous situation that threatens long-term business survival.
There’s no one cataclysmic event. It’s simply death by a thousand cuts.
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