Make more profit with proper pool pricing
Cal Stanley explains that if you want to increase profits by increasing sales, don’t do it by discounting.
What is profit?
In its simplest form profit is what you have left from the proceeds of your sales after deduction of all the costs of running your business for a given period of time. Most of us think of profit or loss as the end result of a battle between sales and costs but it is not really that simple.
Profit is very important because after all, that is why we all work damn hard in our businesses. Without profit we would be better off on the beach every day.
How can you increase profit?
In broad terms by:
1. An increase in prices while keeping costs the same.
2. An increase in sales volume while keeping prices and overheads the same.
3. Keeping prices the same while cutting costs.
In practice numerous variations and combinations may be used.
An increase in sales volume will not necessarily lead to an increase in profit unless your product is priced correctly. In fact you could very well find yourself working harder and harder with even less profit. We all keep, or should keep, our costs to a minimum and I am sure you all try to increase your sales but how many pool builders price pools correctly?
Many years ago a multi-millionaire businessman told me: “As long as your product and level of service is of a high standard you will never go out of business through charging too much.”
History shows that you can and likely will go out of business if you fail to charge enough for your product or service or if you fail to deliver a quality product.
Lowering prices for more sales may give less profit
When businesses start getting into financial difficulty, often the first thing they do is “chase cash flow” or in other words they drop prices with the aim of attracting more sales.
This is exactly what a medium sized business selling in-ground vinyl liner pools in Western Australia did about nine years ago. They offered discounts to get more business, and they offered even bigger discounts if customers would pay the entire contract sum up front (illegal under WA consumer law).
Very soon they were chasing their tails in a spiral that went inevitably down the gurgler within 12 months – because they had given away all the profit in their contracts.
If you want to increase profits by increasing sales then don’t do it by discounting. Find some other way such as offering a better service, selling harder, changing your advertising etc – but DO NOT sell at a lower price!
Let’s look at a simple example and see what happens if you do.
Suppose business has been dropping and you are now only selling 50 pools a year at an average price of $40,000 each with an average gross profit per pool of $9000. Suppose also your total overheads are $430,000 p.a. and due to long term commitments and legal requirements you can’t seem to reduce them any further. A look at the figures below shows that your business has fallen very close to the breakeven point. You are now earning only $1666 every month. Not enough to live on!
Sales: (50 pools @ $40,000) = $2,000,000
Direct cost: (50 pools @ $31,000) = 1,550,000
Gross profit: 450,000
Overheads: 430,000
Net Profit: 20,000
Cash flow is drying up and your creditors are mounting, you are now working more for less so you decide that if you reduce your price by 10 per cent you should sell an extra 20 pools and the extra cash flow this will generate will solve all your problems. What really happens is that you may indeed increase your sales to $2,520,000 p.a. but your direct costs will rise to $2,170,000 and – assuming that you can keep overheads from increasing – you now have turned your miserly $20,000 profit into an $80,000 loss! You have worked your bum off building the extra pools so you can lose a further $100,000. You are now broke and out of business!
Sales: (70 pools @ $36,000) = $2,520,000
Direct cost: (70 pools @ $31,000) = 2,170,000
Gross profit: 350,000
Overheads: 430,000
Net Loss: (-80,000)
Even had you discounted only 5 per cent and in doing so were able to sell an extra 10 pools you would still lose $10,000 for the year. To just break even with a discount of 10 per cent you would have had to sell and build an additional 36 pools and with the discount at 5 per cent you would have to sell an extra 12 pools. Would you work that much harder and still not make a profit? Would you be able to do it without increasing the overheads further? Could you do it without further advertising?
It is pretty clear that reducing prices is not the way out of trouble.
Selling at a profit
Using the same example above, assume you were to increase your price by 10 per cent and in doing so managed to sell only 40 pools:
Sales: (40 pools @ $44,000) = $1,760,000
Direct costs: (40 pools @ $31,000) = $1,240,000
Gross profit: 520,000
Overheads (still the same): 430,000
Net Profit: 90,000
Still not making a fortune but if you sold those 40 pools 15 per cent higher the profit would be $154,000 demonstrating that reduced sales at a higher price can be better than increased sales at a lower price.
Should you ever sell at a discount?
My answer is, in the pool building business almost never.
Most businesses that sell products at a discount either have a large product range and discount only some of it; they discount for short periods of time only or discount some items and raise others. Either way can encourage new and repeat custom to the business.
Unfortunately we only have one product to sell and because of the long life of our product, repeat business is a minor part of overall sales. Selling a pool at a reduced price will only benefit one person – the customer and the chances of him coming back for another pool soon enough is rather slim. Therefor as a rule, I believe pool builders should not discount at all.
Discounting to meet a competitor’s price is acceptable only if it will result in an additional sale over and above that number you have budgeted for at normal profit margins.
Discount it in place of a normal sale and it will cost you money. If discounting to meet your competitors becomes a habit or a general policy you may soon find you are selling more pools at a discount than at normal prices and your profit will suffer even more.
Conclusions
Real results for every business will vary but this does demonstrate that it may well be easier to increase profit by selling slightly less at a higher price than by seeking volume at lower prices
Never try to compete on price as this is a sure way to shrink profits. Rather spend time looking for ways to build a better pool, to give a better service to your customers and charge a higher price for it.
I guarantee you will be delighted with the result.
Cal Stanley draws on his 30 years’ success in pool construction, having run Neptune Pools in WA with a 50 per cent quotation-to-contract conversion ratio, usually winning the jobs at the highest price.
