Price or Overhead
Raise prices a little, or cut costs?
Put in a year of sales and what it costs to run the business. You will see which small change is worth more to your profit.
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The answer, for one year
A 3% price rise is worth about 2 times what a 10% overhead cut is.
Plain arithmetic: sales times the price rise, and overhead times the cut. It assumes you keep every customer and nothing else changes.
Why
Why a small price rise usually wins.
A price rise adds to every sale without adding to the work. Same jobs, same hours, a little more for each one.
Overhead is usually a much smaller number than sales. So 3% of the big number often beats 10% of the small one, and cutting costs that deep can mean cutting things the business needs.
It is not always the answer. If customers would leave, the math changes, and that is worth thinking through before you move a price.
Questions
Questions About Pricing
Should I raise prices or cut costs?
Often a small price rise is worth more, because sales are usually a much bigger number than overhead. It depends on whether your customers would stay, so put your own numbers in above and see which wins for you.
How much is a 3% price increase worth?
About 3% of a year of sales, if you keep every customer. On $600,000 of sales that is $18,000 a year, with no extra work.
How much is a 10% cut in overhead worth?
A tenth of what it costs to keep the doors open. On $90,000 of overhead that is $9,000 a year, half of what a 3% price rise brings in on $600,000 of sales.
What counts as overhead?
The costs of keeping the business open whether or not you make a sale: rent, insurance, software, office pay. What a job costs you to do, like materials, is not overhead.
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Money, books and running a small business in Hawaii, in plain words.
Before you change a price, know your numbers.
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