How Do You Increase Profit? | HVAC Pricing Series Part 11There are only three ways to increase the Profit in your company. You can increase your Total Sales, you can cut your Direct Costs and Overhead Costs, or you can raise your Prices. We will examine each of these to determine which is the most effective and easiest to accomplish. In order to do this we will examine data from a fictional company. Our fictional company has Sales of $500,000, Costs of $450,000 and Profit of $50,000. Let’s decide that we want to increase the Profit by $10,000 to $60,000. The first way to increase Profit is to increase Total Sales. We already know that Profit in our fictional company is 10% of Total Sales: $50,000/.10 = $500,000 in Total Sales. Therefore, if we want $60,000 in Profit next year, then $60,000/.10 = $600,000 in Total Sales. So, to raise our Profit $10,000 next year, we need to increase our Total Sales by $100,000. Our costs also go up in this scenario: $600,000 in Total Sales X .90 in Total Cost percentage = $540,000 in Total Costs. Can we increase our Total Sales by $100,000? That equates to producing 20 more jobs at $5000 per each or performing 1000 more service calls of $100 per call. Will you be able to do that without hiring another person? And where do these additional jobs come from? Who sells these additional jobs, what makes the phone ring with more work? In other words, increasing Total Sales is difficult to accomplish without hiring people or increasing marketing and sales costs. In fact, our Total Costs go up $90,000 to get that additional $10,000 in Profit. The next way to increase Profit is to reduce Costs, both Overhead Costs and Direct Costs. In our fictional company that would mean taking $10,000 out of our total Costs of $450,000, or reducing our costs by 2.3% down to $440,000. In previous articles we have examined how difficult it is to reduce Costs and have determined that Costs rarely, if ever go down. Instead, Costs almost always go up every year. Suppliers have yearly increases, utilities increase, cell phone service increases, wages go up and the list goes on. And, even if you were able to reduce Costs this year, will you be able to keep on reducing your Costs year after year: extremely unlikely. The last way to Increase Profit is to raise your Prices. In our fictional company we would increase our Profit to $60,000 by raising our Prices enough to increase our Total Sales to $510,000. Therefore, $60,000 in Profit divided by $510.000 in Total Sales = a Profit percentage of 11.8%. In our Right Price formula example of $3226 as the Right Price we used 10% as our Profit percentage in our calculation. What happens when we use 11.8% instead? The Right Price increases to $3322: $2000 in Direct Costs divided by .602 (100% -Overhead of 28% and Profit of 11.8% = 60.2% as our divisor). Therefore, $3322/$3226 = 1.0297%: our price went up right at 3% when you round it off. That would mean that a$5000 job would increase by $150, a $100 service call would go up by $3, a $1500 compressor change out would increase by $45. So which of these three ways to increase Profit is the easiest to implement? Obviously, increasing your Prices is easiest to accomplish. It does not raise your Costs in any way. It increases Total Sales by $10,000 just by raising your Prices by 3% overall. It is easy to implement within your company: just decide the date the Prices go up and implement those Prices by increasing your Profit Percentage. It is easy to understand by your customers and it is fair to them because they realize prices go up and they usually go up every year or so. If and when you do grow your Total Sales, your profit dollars are larger as a result of previously raising your prices as well. It is an easy win-win for everyone involved. In summary, the easiest and best way to increase your Profit is by raising your Prices. It is easy to calculate those new higher prices using our Right Price formula.
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