Raising prices to increase profit margins is a time tested tactic to grow a company's profit margins. Here's how Uber's recent earnings call reinforces this often misunderstood concept.
Is Uber profitable
Why is Uber not profitable is a question that has been asked since 2019, when the Uber IPO happened. Uber has been one of the many public DTC companies previously ridiculed for being un profitable for years with many questioning if Uber could ever be profitable. But this week, Uber disclosed massive profits and one of its earliest investors Jason Calacanis shared this on twitter/x.com :
Remember when certain haters in the press said $Uber would never be profitable?
What are the haters getting wrong today, because of their blind hatred of entrepreneurs, capitalism, and wealth?
Uber: $1b+ free cash flow & massively profitable this past quarter 📈😂
After the earnings call in an interview with Wired Magazine, Uber CEO Dara Khosrowshahi was told by the author Steven Levy how his 2.95 miles (4.75 km) ride to the interview costed him 50 USD. A far cry from the good 'ol days of Zero Interest Rate subsidised cheap rides. Uber , like a lot of other companies have also used 'setting prices low until after a reliable customer base is established, then raising prices' tactic to improve profit margins. But why ?
The 1% windfall
Let's say you run a manufacturing business, where you manufacture and sell 100,000 electronic widgets making $1000,000 a year in profit. You have a fixed cost of $3,000,000 a year and a variable cost of $60 per widget. In the coming year you aim to increase our profit margins , so what should you focus on ? What are the profit drivers that you should focus on optimising more than the others ?
Selling more widgets
Reducing your fixed costs
Reducing your fixed costs
Or increasing your price
To test our profit drivers, let us try and see how a 1% improvement in each of the above profit drivers improves profit margins.
As we see in the above example, Increasing prices by 1% leads to a 10% increase in profits. In fact, Increasing prices is not just the most impactful way to increase prices but also the fastest way. Reducing Fixed costs is a long process that may take many months if not years, while selling more leads to increases in variable costs such as marketing spend. Hence, the highest impact profit driver is increasing prices. But increasing prices should be done properly and methodically and as a manufacturing or a retail business, you could use something called a price increase letter.
Here are some useful articles written by the Konigle team to help you increase prices the right way.