Improving Your Business’s Profitability

Learn how to analyse your pricing on products and services to focus on

profits.

Eloise Pasianotto CMA MBA

“Focusing on Success”

• As a Certified FocalPoint Business Coach Eloise works with a broad spectrum of clients to increase their sales, profits, efficiencies and more in their businesses.

• She brings over 28 years of award winning experience, from various leadership roles in the distribution, manufacturing and service industries .

• Eloise has presented dozens of workshops to hundreds of professionals and business owners increasing their effectiveness and business results.

• She also specializes in working one on one and in group to help her clients achieve massive success in their business.

How can you increase Profits?

Objectives today:1. Understand the impact of Costs and Expenses

on your Breakeven point.2. Learn the impact of gross margin and cost

mark up methods on your profitability.3. Build a pricing model to understand the

impact of pricing and the affect discounts have on your business

Agenda

• Definitions of key terms and some questions• Cost Mark up and Gross Margin Pricing

Methods• Pricing Model• Affect of Discounts• Next Steps

Definitions

• Cost of Goods Sold = the sum of the costs related to the products or services sold– Fixed Costs e.g. equipment– Variable Costs are volume related e.g. materials– Classification and Assigning

How are you defining and allocating your costs?

What level of review do you have in place?

Definitions

• Gross Profit = Difference between Sales and Cost of Good Sold

• Gross Margin – Generally is stated in percent – Gross Profit divided into Sales– Gross Margin Dollars is the

same as Gross Profit

Sales = 125.00 COGS = 75.00 Gross Profit = 50.00Gross Margin = 40% (50/125*100)How have your margins been

tracking?

Definitions

• Expenses– Fixed Expenses e.g. headcount– Variable Expenses e.g. office supplies, travel– Discretionary

What are your biggest expenses? How much discretionary spend do you

have? How are you controlling them?

Definitions

• Contribution Margin (Dollars)– Sales less variable costs– Excellent to use to compare what products or

services contribute more to your profitability – Analyze for opportunities to reduce costs

What are your Contributions Margins by Product or Services?

Check Point

• Know your total fixed costs and expenses

– What makes it up?– This number is a key baseline number that you

must recover through profits– Look for ways to minimize these• Ideas?

What is your Number?

Definitions

• Break Even = What volume of units do you need to sell to recover all your fixed costs and expenses?– Calculate Total– For each Product or Service

What is your break even level?

Break Even Working Example

Selling price = $125.00Fixed Costs and Expenses total = $250,000 *Variable Cost = $75.00

Breakeven = Total Fixed Costs and Expenses divided by (Selling price – Variable Cost)

Step 1 $125.00 - $75.00 = $50.00Step 2 $250,000/$50.00 = 5,000 units

Break Even Working Example

Therefore Total Sales must be at least

5,000 units X $125.00 = $625,000

What is your total sales needed? How are you tracking?

Cost Mark up and Gross Margin Pricing Methods

• Cost Mark –up– Add a dollar value to your Cost to determine

Selling Price– Apply a factor to your costs to Determine your

Selling Price• Gross Margin– Use a predetermined desired Margin to determine

your Selling Price

Cost Mark up and Gross Margin Pricing Methods Compared

Cost Mark up Cost = $75.00Mark up = $30.00 or 40%

Selling Price = $105.00Calculated as:$75.00 +$30.00=$105.00or$75.00*1.40= $105.00

Profit = $30.00 (28.6%)

Gross MarginCost = $75.00Desired Margin % = 40%

Selling Price = $125.00Calculated as:$75.00/(1-.40)=$125.00

Profit = $50.00 (40%)

Cost Mark up and Gross Margin Pricing Methods Impact to Gross Profit $

10% 20% 30% 40% 50% 60% 70% 80% $-

$50.00

$100.00

$150.00

$200.00

$250.00

$300.00

$350.00

Gross Profit using Gross Margin to calcu-late SP

Gross Profit using Cost Mark up to calculate SP

Basic Pricing Model

Price per unit 125.00$ Units Sold 5000Variable Cost per Unit 75.00$

Percentages Per UnitSales Revenue 625,000.00$ 100% 125.00$ Variable Costs 375,000.00$ 60% 75.00$ Contribution Margin 250,000.00$ 40% 50.00$ Fixed 250,000.00$ 40% 50.00$ Profit -$ 0% -$

Break even sales VolumeBreak even sales

Pricing Analysis and Modelling

5,000.00 625,000.00$

Basic Pricing Model

Price per unit 145.00$ Units Sold 5000Variable Cost per Unit 75.00$

Percentages Per UnitSales Revenue 725,000.00$ 100% 145.00$ Variable Costs 375,000.00$ 52% 75.00$ Contribution Margin 350,000.00$ 48% 70.00$ Fixed 250,000.00$ 34% 50.00$ Profit 100,000.00$ 14% 20.00$

Break even sales VolumeBreak even sales

3,571.43 517,857.14$

Pricing Analysis and Modelling

Affect of Discounts

• Discounts must be carefully considered to not erode profits BEFORE fixed expenses are recovered.

Price per unit 112.50$ Discount by 10%Units Sold 5000Variable Cost per Unit 75.00$

Percentages Per UnitSales Revenue 562,500.00$ 100% 112.50$ Variable Costs 375,000.00$ 67% 75.00$ Contribution Margin 187,500.00$ 33% 37.50$ Fixed 250,000.00$ 44% 50.00$ Profit 62,500.00-$ -11% 12.50-$

Break even sales VolumeBreak even sales

6,666.67 750,000.00$

Pricing Analysis and Modelling

Next Steps To get more control over your Profits

1. Know your Breakeven Point 2. Review your Pricing and Discounts3. Understand your costs and expenses

– Separate variable versus fixed– Plan in place for regular review and reduction *

4. Analyze your products and services– Know your Profit generators – Address your Profit eaters

• Tools to help– Pricing matrix model

– * PIC Profit improver Checklist for Costs and Expenses

Thank youFor letting me share some concepts with you .

I hope you take action and have a positive effect on your business!

If you would like to receive • Pricing model template• PIC Profit Improver Checklist • Questions and/or more information

Please contact me at either: info@effectiveprofessionalconsulting.comOr call 289-553-0241

Have a profitable 2013!

Eloise Pasianotto CMA MBA