Even a small price increase can make a big difference in your overall profitability. Margins in the tire sales business are razor thin. Increasing prices just 5% can widen those margins a bit and have a profound impact on your bottom line.

Hypothetically, if a company’s gross revenues from sales are $1 million, a 15% profit margin means total net profits are $150,000. If that same company raises its prices 5%, its total gross revenues increase $50,000, resulting in a net profit of $200,000 – a profit increase of 25%.

Five percent sounds like a lot, until you really look at it. On a tire that sells for $100, a 5% increase is just $5. If your labor rate is $46 per hour, another 5% is $2.30 per hour. Another 5% on a $20 part is just $1.

In general, however, businesses are reluctant to charge the highest price they could realistically get for their products. In his book, Double Your Profits in Six Months or Less, author Bob Fifer says business owners should ask themselves an important question: “How much business would I really lose if I raised my prices two, four, five or even 7.5%?” Fifer says some customers may grumble at a 2% or 5% increase, but few will stop buying altogether.

On the flip side, Fifer says many suppliers will cut their costs an additional 2% to 5%. With tire suppliers, you might have to adjust terms or change buying patterns to earn reduced prices; suppliers of other products may just give you a break because you’re a good customer. The best way to find out is ask.

A similar boost to profitability can result if you reduce costs associated with general business operations – office products, utilities, business insurance, etc. – but you’ll work much harder to achieve cuts in these areas.

– Source: Tire Review Business Toolbox