Profit is usually the main reason we go into business. But profit can 
often be difficult to manage.
Simply put, profit is a residual. It is the amount left over after you have paid all your expenses.
To increase your profit, you need to focus your attention on these four areas:
- Price – the amount charged to the customer for a product or service
- Quantity/volume – unit numbers of product sold
- Fixed costs – costs you incur regardless of whether you make any sales
- Variable costs – costs that vary in direct proportion to the amount of product sold
price
If you decrease price, sales volume needs to increase to compensate for the decline, and then must increase further to result in increased profit.
For example, if you sell a product for $10 that has a 10% profit margin ($1), and you decide to decrease the price to $8, the profit per unit will reduce to $0.80. Therefore you will need to sell more units than before to continue making the same profit. Then to increase profit, you need to sell even more than that.
It is also important to understand the effect on overhead expenses with an increase in volume, such as storage, staff resources etc.
Alternatively, if you increase price, you need to ensure that the increase does not decrease sales volume. Depending on your customers’ perceptions and your marketing activities, an increase in price may in fact increase sales volume.
Before you change your prices it is important to understand what effect this will have on volume and ultimately, your profit.
quantity/volume
When increasing volume to increase your profit, you need to focus on areas such as:
- Resource efficiencies
- Staff training to encourage customer loyalty and upselling
- Taking advantage of the benefits of your location (e.g. are you near a doctor, a school or another high traffic area)
- Store layout
- Sales of front shop vs dispensary products
- Holding costs
When increasing volume, prices can either remain unchanged, or can be decreased or increased, depending on your products and the likely response from your customers.
It is important to monitor volume changes in relation to price in order to increase profit.
fixed costs
An increase in fixed costs needs to result in an improved product or service, and lead to higher prices and/or an increase in volume.
A decrease will improve profit, assuming that any price and/or volume decrease is not greater than the saving in fixed costs.
To reduce fixed costs, consider:
- Longer term rental contracts without market reviews
- Review your insurance costs
- Make the best use of available resources and create efficiencies
variable costs
A decrease in variable costs will increase profit. To decrease variable costs, consider:
- Bulk discounts and rebates on wholesale products
- Stock control, including holding and movement of stock
On the other hand, profit can be increased by raising the variable cost per unit, when it allows a higher price to be charged or results in an increase in volume.
As you can see, no single factor can be considered without taking into account the impact on each of the other factors. An increase or decrease in each of or all of the four factors will affect profit.
Any profit improvement strategy must focus on:
- Achieving a higher gross margin by increasing price or reducing variable costs.
- Achieving greater sales per dollar of fixed costs by increasing the profitability of those things that have a fixed cost.
how can i increase the profit my pharmacy makes?
Did you know that an improvement of just 2% in each of the profit improvement factors will result in a significant increase in profit?
We can show you how to implement these changes in your business.
Contact Michael Ward, our Pharmacy Specialist, today on 07 3833 3904 or michael@elliottsgroup.com.au to start increasing your profits.
