Methods of Improving Profits and Profitability 2.3.1
Increasing profitability is often a major aim for growing businesses. There are several ways in which this can be achieved. Businesses are not limited to one of these options but must realise each option has knock on implications.
1) SELL THE SAME AMOUNT AT HIGHER PRICE
This will hopefully increase your revenue... HOWEVER, Will you lose customers if prices are raised? What prices do competitors charge? because if you're too high then customers could just go to your competitors as some believe more in a bargain than brand loyalty, so how loyal are your customers? Will you have to spend more on maintaining brand image? Higher prices drives customers away, leaving a bad reputation on the brand so the business may have to maintain its brand image to keep a customer base. This option is only good if the product is price inelastic such as gasoline because the business has a necessity good that consumers don't mind if prices go up a little bit, meaning demand doesn't fall rapidly like a price elastic product would.
Example:
Currently sell 1000 units at £45
Sales revenue = £45000
Cost of sales plus expenses = £35000
Operating profit = £10,000 (£45,000 - £35,000)
Operating profit margin = £10,000 / £45,000 x 100 = 22%
2) SELL MORE AT THE CURRENT PRICE
This will also hopefully increase your revenue... HOWEVER, Will you gain any new customers by doing this? Can you attract them from your competition? Is there a new market you can enter? By doing this you could enter an abroad market and start selling there as well meaning more sales, however, this depends on whether the business has to spend more on marketing and how much more it can afford? Budget needs to be quite large for more capital spent on marketing. Can you encourage existing customers to buy more?
3) SELL THE SAME AT THE SAME PRICE BUT CUT COSTS
This will reduce your costs... HOWEVER, Will you lose customers? Cutting costs could impact the quality of the good, if prices are cheap but the product won't last 5 minutes, they may go to competitors who have slightly higher prices but better quality products, therefore will quality be affected by doing this? Will image be tarnished? People may start to see the business as cutting corners to be cheap and therefore won't be in a very favourable light. Can you improve operational efficiency? Maybe the product is currently labour intensive and instead the company could be capital intensive and rely heavily on machinery and not workers, however this depends on whether the business has the capital to invest in more equipment.
1) SELL THE SAME AMOUNT AT HIGHER PRICE
This will hopefully increase your revenue... HOWEVER, Will you lose customers if prices are raised? What prices do competitors charge? because if you're too high then customers could just go to your competitors as some believe more in a bargain than brand loyalty, so how loyal are your customers? Will you have to spend more on maintaining brand image? Higher prices drives customers away, leaving a bad reputation on the brand so the business may have to maintain its brand image to keep a customer base. This option is only good if the product is price inelastic such as gasoline because the business has a necessity good that consumers don't mind if prices go up a little bit, meaning demand doesn't fall rapidly like a price elastic product would.
Example:
Currently sell 1000 units at £45
Sales revenue = £45000
Cost of sales plus expenses = £35000
Operating profit = £10,000 (£45,000 - £35,000)
Operating profit margin = £10,000 / £45,000 x 100 = 22%
2) SELL MORE AT THE CURRENT PRICE
This will also hopefully increase your revenue... HOWEVER, Will you gain any new customers by doing this? Can you attract them from your competition? Is there a new market you can enter? By doing this you could enter an abroad market and start selling there as well meaning more sales, however, this depends on whether the business has to spend more on marketing and how much more it can afford? Budget needs to be quite large for more capital spent on marketing. Can you encourage existing customers to buy more?
3) SELL THE SAME AT THE SAME PRICE BUT CUT COSTS
This will reduce your costs... HOWEVER, Will you lose customers? Cutting costs could impact the quality of the good, if prices are cheap but the product won't last 5 minutes, they may go to competitors who have slightly higher prices but better quality products, therefore will quality be affected by doing this? Will image be tarnished? People may start to see the business as cutting corners to be cheap and therefore won't be in a very favourable light. Can you improve operational efficiency? Maybe the product is currently labour intensive and instead the company could be capital intensive and rely heavily on machinery and not workers, however this depends on whether the business has the capital to invest in more equipment.
Comments
Post a Comment