Growing Profit: What Method Pays off Best?
As the awareness for a better return on time and investments continues to improve in our industry, it might be important to consider where your improvements will matter the most. There are several ways you can improve cash flow and company profits, including:
- Reducing the cost of the materials you use
- Growing the number of projects you produce
- Growing the average price of the sales you make through maximizing your pricing
Each one of these can improve your profitability because they will improve your margins or your sales volume. But one of these provides a significantly better outcome than the others and one provides a much smaller return on your time and effort than the other two. As an owner of a small business, you wear many hats and the list of things you must accomplish to be successful seems endless. Because of this, it is essential that we get the most from our time and efforts. I see many frame shop owners spend a lot of time shopping for lower priced materials. They switch distributors to save a few dollars on foamboard or glass. While they believe they are doing something valuable for their company, it may not be nearly as important to their profits as they think.
Stop spending your time searching for the best price on materials and start charging the prices necessary to improve your profits.
This lack of loyalty to a distributor can also cause relationship problems that could maybe have been avoided. As we will see in the example below, chasing the lowest cost of materials has very little impact on profit compared to other methods. In fact, reducing overall cost of materials has a very small impact on profit compared to improving average ticket and increasing the number of projects you sell. But what may be even more startling is that growing sales volume or total projects is not as effective as selling projects with a higher price! As you see in the chart, growing sales volume is actually less effective than raising the average price of each sale when putting money in the bank and in this example we are not even considering the labor cost involved with creating more projects. Also, as we all know, it is much harder to increase sales by finding more customers.
Making better money on the customers you already have is far easier and doesn’t require the marketing investments that new customer acquisition does. Lets take a look at the numbers. Here is what a custom frame shop might be producing:
- Current average price of a sale = $225
- Current number of projects per year = 1000
- Current custom sales per year = $225 x 1000 = $225,000
- Cost currently paid for materials = $63,000 (28% of sales)
- Current dollars available for expenses (gross margin) = $225,000-$63,000= $162,000
Here’s what happens when we improve each of the three methods of growing profit. Amazing difference! This example shows us that raising prices has over 3.5 times the effect on your ability to pay expenses than finding cheaper materials. This dramatic difference can be achieved by only increasing the average price per project by $34! Even more impressive, this example shows that this price increase would be almost $10,000 better than if 150 more projects were done. Hopefully, this chart makes it obvious that your return on improving the price you charge customers far outweighs searching for vendors who can save you a few dollars on supplies.
Concerned that raising your prices could cause you to miss more sales? In the above example, if the average project increased by $34 to $257.75 per project, it would only take 870 projects to produce the SAME income as it does with an average $225 selling 1000 projects! That means that you could lose 130 sales of the 1000 being done now and still achieve the same sales volume of $225,000.
In addition, if you lost those 130 sales, you would have far less labor involved with producing the same amount of sales. Finally, because you are making more money with each sale by raising your prices, the ability to pay your expenses would improve more than $8,300 even with the loss of 130 sales. You could work far less and earn more! Here’s how it works:
Improving pricing can also be accomplished by reducing the amount and frequency of your discounts. Studies show that the average frame shop project is discounted 18%! If that were applied to our example, the shop doing an average priced sale of $225, would have actually been starting at $274 before discounts were given. If that shop would stop discounting and trust the original prices, they would improve their average sale by $49. That single change in their operation would improve their ability to pay expenses by nearly $50,000 without increasing their prices or selling an additional project! So give the vendors a break. Stop spending your time searching for the best price on foamcore and start charging the prices necessary to improve your profits- it’s easier, more profitable and so much more fun.