If you raise prices 20%, how much do you increase profit?
I was chatting with a food entrepreneur who I really respect this week and they said something that surprised me.
They made a comment that increasing prices 20% might alienate customers, and therefore wasn’t worth the risk for just 20% lift in profit.
The issue is that 20% price increase doesn’t just lead to a 20% increase in profit. As an example:
You sell an item for $1 and it costs you $0.80 to make ($0.20 gross profit)
You increase price to $1.20, it still costs you $0.80 to make ($0.40 gross profit)
20% increase in price → 100% increase in profit 🤑🤑🤑
If you double the number of founders, how much does it increase your chances of success?
That food entrepreneur succeeding wildly anyways, so it might not matter, but it made me think of other places in the business where there are superlinear returns.
What stands out most to me is that I think one of the big factors that is helping Tom and me is that we are a team of 2 and not just a single person.
There’s a minimum input energy for a indie food business to just SURVIVE, and I think that is something like “the amount of work that 1.2 normal humans can do”.
So a solo entrepreneur in food is just ALWAYS buried and treading water because they are 1.0 people trying to do the work of 1.2 people. As a result they’re often enlisting the volunteer labor of friends or family in order to just not drown.
Adding a 2nd person makes the enterprise flip from “not enough hands to stay afloat” to “having enough bandwidth to be strategic and start growing”.
1 baker may reach 0.8 efficiency (1*0.8 = 0.8)
2 bakers get you to 1.0 efficiency (2*1.0 = 2)
3 bakers may bring the efficiency even further to 1.2 (3*1.2 = 3.6)