Soak It Up on Margin & Costing
“REVENUE – [FIXED COSTS + VARIABLE COSTS] = PROFIT”
Our business profit is derived from revenue minus cost, by applying the formula above, how can you save on certain costs in order to improve your business profit? One of the ways is to reduce your fixed costs. These include reducing your utility bills, phone bills and even something as simple as limiting paper usage within your business environment.
You would be surprised. A little difference in your work culture can go a long way in helping to improve your Profit Margin. Another way to increase your profit would be to increase your price, but this method has a risk attached to it and is not recommended for use on every occasion.
One word of advice – Do not give discounts to increase your revenue. If you go to shopping malls regularly, you would notice huge promotional signage in and around the mall that screams 50% SALE or BUY 1 FREE 1.
So which is better?
In the Accounting perspective, these two promotions are technically the same – the price is still RM50 for one item. In the psychology or marketing perspective, however, it is a world of difference.
Now, if you are selling your product that is originally priced at RM100 at a 50% discount, you are actually losing RM50 in the process.
But, if you were to sell your product using the BUY 1 FREE 1 method, then you are still gaining RM100. The difference is that now your customer gets two products instead of one.
Psychology also plays a part in the difference between these two strategies. A 50% SALE strategy may sometimes give off the impression that you have a high Profit Margin, which is why you are able to offer such a high discount.
This mindset could potentially lead to your customers constantly waiting for your SALE season before purchasing from you, which creates a problem for your business.
On the other hand, the BUY 1 FREE 1 strategy will not only help you clear your existing stock faster, it will also help you to maintain your revenue at RM100.
Furthermore, your customers would also get an impression of Value for Money and feel satisfied with their bargain.