At Tom Vignali CPA, Inc., we come across numerous ingenious ways to address price increases. Here are just two examples.
Example One: Check-Up Uncovers Savings for Vet Clinic
Susan was responsible for the pricing/purchasing at a local veterinary clinic. While reviewing some of the laboratory costs for one of the tests they frequently provided, she noticed that the invoicing for this test from their outside lab indicated that it was not part of the discount pricing plan. She researched further and discovered that this one test was really multiple tests included in one lab pricing module. When she queried the vets as to why they were ordering this specific test, she was told that of the five tests performed in the one module, it included three of the tests they were looking for, and that it was easy to order this “one test”. The cost for the lab test was $55.00, and the suggested retail price to the customer was $122.00.
Upon further review, Susan learned that the three specialized tests that the vets were looking for were part of the discount pricing program from the outside laboratory. The net total cost for ordering these three individual tests was $26.50, and the net suggested retail price to the customer for all three tests combined was $122.00. All that needed to be done was to take one blood sample from the pet and submit it for three different test results/analysis, which was extremely easy to do on the lab-supplied computer ordering system. The vets would get the results they were looking for, the clinic would obtain the required test results at a discounted price, and the charge to the customer would remain at the industry-accepted suggested retail price.
Previous scenario analysis:
Retail Price: $122.00
Cost: 55.00 45%
GPM 67.00 55%
New scenario analysis:
Retail Price: $122.00
Cost: 26.50 22%
GPM 95.50 78%
The net impact is that just by changing the test ordering process, the clinic realizes an additional GPM of $28.50 per test. Since the clinic performs this test approximately 600 times per year, the total net increase in GPM is $17,100 per year.
This was just one test! Susan went on to review all of the other tests, costs, and pricing as well. When she was done, without increasing any pricing, without increasing any services, Susan was able to save the clinic almost $120,000 per year in lab billing costs. This was equal to one full-time vet salary, so they hired another full-time vet, expanded their services and hours, and then revenues really took off!
Example Two: Carpenter Cuts Costs with New Buying Strategy
Sam provides excellent carpentry work to his clients. On one of his projects/designs, he uses 1x6x4 select pine boards. He would normally purchase these boards at the local lumber store for $4.25 per board. Recently, lumber prices went up by 30 percent, resulting in a new cost per board of $5.52. His competitors had already started to pass this increased cost on to their customers. Sam thought this would be an excellent time to become even more competitive, but he didn’t want to lose money in the process. He researched the possibility of purchasing larger length boards and cutting them down to 4-foot sections. What he discovered was this:
4′ boards @ $5.25
8′ boards @ $8.52
12′ boards @ $13.65
16′ boards @ $18.62
Since his design work didn’t actually require an exact 4-foot board (it could be a tad shorter), he looked to see what the actual cost would be if he purchased longer boards and cut them down to size. What he discovered was this:
4′ boards @ $4.25 (old price)
4′ boards @ $5.52 (new price)
8′ boards @ $8.52 / 2 = $4.26 per 4′ section
12′ boards @ $12.76 / 3 = $4.25 per 4′ section
16′ boards @ $16.98 / 4 = $4.24 per 4′ section
By purchasing longer boards and cutting them down to size, Sam had the option to either keep his costs the same, making the same profit as before the price increase, or increase his prices but by far less than what his competitors had done, thereby increasing his profit margin. In either case, simple creative thinking allowed Sam to remain cost and price competitive.
What ultimately did happen is that Sam researched further and realized that if he purchased bulk, unfinished lumber and invested in planing equipment, he could actually plane the raw wood to whatever size and dimension he wanted, ultimately significantly reducing his cost of materials.
Sometimes, researching and sourcing your raw materials might lead you to simple cost-saving activities, or they might lead you to alternative modes of business. Oh, by the way, Sam’s business has expanded –he’s now processing “made to order” lumber for many of his former competitors. While he continues with his carpentry work, the lumber processing work is soon to exceed the carpentry revenues.
Take a closer look at how you do business
These are just two examples we have come across and have assisted with. At Tom Vignali CPA, Inc., we encourage our clients to look at different ways of doing things, better sources, better processes, novel approaches. You don’t always have to increase your revenues to increase your profits. You might be able to make more money doing something different. You might be able to make more money from the customers and clients you already have. Sometimes, everything you want or need is right in front of you. Order a different test or order a longer board of wood. Sometimes it helps to “turn on the light”!
If you would like to further discuss this process, don’t hesitate to contact us at: Tom Vignali CPA, Inc.
Contact Us:
Thomas W. Vignali CPA Inc.
118 Point Judith Road
Narragansett, RI 02882
T: (401) 415-0798
tom@tomvignalicpa.com
www.tomvignalicpa.com
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