An Interesting Look at Pricing

[merlin3]

I stumbled across this article as I was looking for a dry cleaning forum.

So ranging from my cheapest machines to my largest, I could raise prices in the range of $0.40 to $1.50, run off 45% of
my customers and lower my utility bills and wear and tear.

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If you have ever wondered how much your business must increase in order to stay on an even keel after cutting prices, please let me share this with you. The figures come from the Eastman Kodak Research Department several ago and are still valid today.

Assuming an anticipated profit of 25% on selling price, a 2% cut in that selling price means you must increase your volume of sales by 8.7% to make the same profit as before the price was lowered.

A 3% cut means a 13.6% increase in sales is necessary to make the same profit as before the cut.
A 5% cut means a 25% increase in sales is necessary to make the same profit as before the cut.
A 7.5% cut means a 47.8% increase in sales is necessary to make the same profit as before the cut.
A 10% cut means a 67% increase in sales is necessary to make the same profit as before the cut.
A 20% cut means a 400% increase in sales is necessary to make the same profit as before the cut.

TO REVERSE THIS PROCESS

A 3% increase in prices means the same profit on 90% of sales volume.
A 5% increase in prices means the same profit on 83.5% of sales volume.
A 7.5% increase in prices means the same profit on 77% of sales volume
A 10% increase in prices means the same profit on 71.5% of sales volume
A 15% increase in prices means the same profit on 62.5% of sales volume
A 20% increase in prices means the same profit on 55.5% of sales volume.

[ldm]

I think there is so much we don't know behind these particular numbers, that we can only rely on the fact that Eastman Kodak is in BK. Les

[Adamski]

Merlin,

That Kodak study does not apply to a laundromat because we have a high level of fixed expenses and a low level of customer-determined expenses. For example, a store selling photo film (not that long ago) has to buy more film to serve more customers at a discounted price. That store might also have to hire more help to serve the additional customers coming in the door. So the customer-determined operating costs can increase dramatically. A laundromat, on the other hand, does not have to buy any additional product or hire any additional help when more customers come in the door. The laundromat's only customer-determined operating cost that will increase is the utilities that the additional customers use.

We all know that if we raised our prices by 20%, we could not survive on just 55.5% of our current customer base. That's because our industry is more unique than we sometimes realize.

[Howard]

I have always found price increases to work very well at thinning the heard and increasing profits. Higher prices means you need fewer turns to obtain the same gross revenue while reducing your cost of utilities as the heard thins. Further, the customers you lose are typically your worst customers - those that complain about price and other things while causing the most abuse to your equipment. Now obviously you cannot raise prices so high that you lose all your customers but a 10% to 15% price increase generally will improve your bottom line.

[silver56]

Originally Posted by Howard

I have always found price increases to work very well at thinning the heard and increasing profits. Higher prices means you need fewer turns to obtain the same gross revenue while reducing your cost of utilities as the heard thins.

Good point. I think a lot of businesses are afraid to raise prices but if you deliver exceptional service and quality then there are people (like me) who will pay for that. Sometimes it's not worth being the dominant players amongst the cheapest customers in society.