Understanding basic business finance is essential for most business decisions.
Two sales professionals has got two different ideas how to reach success:
Seller One says: ”Let’s cut prices 10% and I guarantee we will sell 10% more!”
Seller Two says: “No, let us increase prices 10% instead, we will only sell 10% less!”
Who of the two is right? Or does it even matter what you decide to do? Ten percent higher price gives ten percent lower volume.Ten percent lower price gives ten percent higher volume – so what is the difference? It actually makes a huge difference. Not on sales – but on bottom-line.
Let us take an example:
Let’s say we sell 10 units every day, at the price of 10€. So our sales are 100€ per day. Now, let’s assume we buy the products at a price of 5€ per piece.
The situation today:
Volume: 10 units
Total sales: 100€
If we cut prices:
Volume in units: 11 units
Total Sales: 99 €
And if we increase prices:
Price: 11 €
Volume in units: 9 units
Total sales: 99 €
It seems it makes no difference. Better to stay where we are, right? Wrong! If the cost is 5€ per unit:
The situation today, gives cost of goods sold, 10 x 5 = 50, which gives a profit of 50.
If we cut prices, cost of goods sold is 11 x 5 = 55, which gives a profit of 44.
If we increase prices, cost of goods sold is 9 x 5 = 45, which gives a profit of 54.
So, Seller Two is right. Her idea will give a profit which is 23 % higher than the profit coming from Seller One’s idea!
This example is obvious once you know it. Nevertheless, our 30 years of experience shows that sales people miss out on a lot of opportunities. Many actually lose negotiations that they think they have won, by not understanding business finance well enough.
Contact us to discuss how we can help your people understand this better.