Should I charge less?

Monday, September 22nd, 2008

Dear Norm,
My home-based design business sells store fixtures and related equipment to the retailers we work with. I try to operate on a 25 percent to 30 percent gross margin, but I don’t know if that’s appropriate. I always wonder how much more revenue we could get if we charged less.

Dear Norbert,
You’re wondering about the wrong thing. You should be asking yourself how much less revenue you’d get if you charged more. Gross- and net-profit lines are far more important than sales. I’d greatly prefer to have $20,000 in gross profit on $50,000 in sales than to have the same gross profit on $100,000 in sales. Why? Because I’d have fewer headaches, fewer shipments, fewer people, and on and on. If I were you, I’d look for ways to increase your margins, not reduce them. Maybe you can get better deals on the products. Maybe you can cut your shipping costs. Yes, there are circumstances when it makes sense to cut prices, but I wouldn’t do it unless you’re certain that you’ll get the additional sales—and that they’ll be worth it.
Yours truly, Norm

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