In every business, there are those who want to cut prices.
They figure that if business is good, lower prices will only make it better. And if business is bad, cutting prices will spur more sales and attract new and existing clients.
The truth is that no business can cut prices without reducing the level of service they offer or the quality of their work. In the automotive repair and service world, damaging either of those will have a dramatic impact on credibility.
Most auto repair shops simply do not charge enough for their products and services. Their margins are already too slim to fuel growth in the business. Cutting prices often makes matters much worse for a shop. They have to increase sales significantly to recover the dollars they lost by dropping their prices. They end up working hard, not smart.
Suppose that you sell 100 units of a certain item every month. They cost you 55 cents each and you sell them for $1, giving you revenue of $100, a gross profit of $45, and a gross profit margin of 45%. If you cut your price by 15% and sold the same number of units, your revenue would drop to $85, your gross profit to $30, and your gross profit margin to 35%.
But, if you want to maintain your original $45 gross profit after the price cut, you would have to sell 50% more units. Here’s what the math looks like (with GPM representing gross profit margin):
So, in our example:
In other words, your original margin of 45% discounted by 15% means your unit volume would have to increase by 50%. You would now need to sell 150 units to maintain the same dollar gross profit you were making when you were selling the 100 units.
Mathematics is a very precise science.
Believe it or not, it would make more sense to have a price hike. If instead of lowering the price of your item, you raised it by 15%, and your unit volume stayed the same, your sales would now go up to $115 and your gross profit to $60.
To figure out how much your sales would have to fall off before your gross profit dollars start to shrink, you use the same formula, but this time you add (rather than subtract) the price change percentage:
You interpret the results from the mathematical formula this way: before you were selling 100 units, and now with a price increase of 15%, as long as your unit volume does not go below 75 units (25% less volume), you are making more money. The price increase would improve your gross profit in dollars from the original $45 even with a sales drop. The math proves that you can sell less volume and make more money.
Selling less actually gives shops more time to spend educate clients, enhancing their credibility, and building the trust factor.
Your ASP client is now working smarter instead of harder. We need more of that. Counsel your clients on the necessity to price for profit and prove your point by showing them the math.
Bob Greenwood is an Accredited Master Automotive Manager (AMAM), offering personal business coaching and ongoing management training. You can reach him at firstname.lastname@example.org.