What Impact Do Prices Have On Profits?
E-book distributor Smashwords has done some studies on e-book pricing, and what they’ve found is that $2.99 is one of the best price points for e-books in any genre, hence the reason that is such a popular price. However, they’ve discovered that books that sell for $5.99 yield more profits to the author/independent publisher. This is significant because the higher price might actually result in fewer sales, but because the sales are still sufficient enough to allow independent authors an opportunity to earn more income, you could call that price point a “sweet spot.”
Could we say that every product on the shelf has a sweet spot? Will you sell more women’s clothing if you lower the price? What will that do for profits?
You can take any product in your inventory and create a historical graph on sales. You can graph how many units you’ve sold and at what price you’ve sold those units. You can also graph your profit margin at each price point. It’s probably something you should do for every product in your inventory because it could reveal where you should be pricing each product for maximum profits.
Why Price Affects Profits in Retail
It’s the law of supply and demand. As price goes up, fewer people want a product. But that doesn’t mean that your profits will necessarily go down. In fact, your profit for each unit you sell will go up, and you could very well end up with more money in your pocket overall.
Take 100 widgets, for example. Let’s say you sell those widgets for $2 each and it costs 50 cents to make them. That’s $1.50 profit for each widget you sell, a total of $150 profit. But what if you raise the price to $3.00 each and instead of selling 100, you only sell 80?
80 times $3.00 is $240. Subtract the $40 it cost to make those widgets and your profit is $200, $50 more than selling 100 widgets for $1.00 less.
Your job as retailer is to figure out the price point for each product in your inventory that will maximize your profits. It’s not an easy thing to do, but if you graph your historical sales data, you can see just where you are losing money on sales, and where you are making money on sales. Learn more about retail price management from ChainDrive.